This graph shows why South African won't need an IMF loan soon

Business Insider SA
Argentina, IMF
Argentinian protests against IMF measures.
  • South Africans are scared about the prospect of an IMF loan - but a new report by Futuregrowth shows that government has an important factor working in its favour. 
  • It avoided the "original sin" of issuing bonds in foreign currencies.
  • By sticking to rand-denominated bonds, it has protected itself against a weakening rand.
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The prospect of an IMF loan continues to unnerve South Africans, despite the insistence from the feared lender that the country doesn’t need its help.

The IMF has a reputation for demanding painful commitments, including higher taxes, pension reforms and even fuel price hikes. Recently, its harsh measures in Greece and Argentina, as well as Pakistan, have come under fire.

A new report by Futuregrowth, South Africa’s biggest specialist fixed-income investment manager, confirms that requiring help from the IMF is “not a realistic expectation in the near term”.

While it still believes that South Africa’s state finances are in a dire state, with public-sector debt more than doubling in the past ten years, Futuregrowth says the government has been “astute” by borrowing money in rands.

“The so-called ‘original sin’ of foreign currency debt issuance has been well avoided, with a modest 5.5% of outstanding gross government debt denominated in foreign currency.”

This means that only 5.5% of government bonds are not in rands. This is a massive boon: when the rand weakens, government doesn’t have to pay back more to foreign debtors. Its interest payments remain unchanged. 

This is the crucial difference between South Africa and the group of countries that have fallen off the fiscal cliff in the past decade, says Futuregrowth.

South Africa’s foreign currency denominated debt issuance compares favourably relative to countries that have previously received an IMF bailout:

Government debt that has to be paid back in foreign currencies. Source: Futuregrowth

“The importance of low foreign currency debt issuance coupled with a free-floating exchange rate regime, which by design acts as an economic ‘shock absorber’ (…) cannot be overstated,” says Futuregrowth.

When a currency weakens, a country’s export products suddenly become much cheaper to other countries. This usually helps to get its economy out of a spot of bother. For example, in the case of Greece, which used the euro, this was not an option.

Another thing in South Africa’s favour is its sophisticated financial markets, and the ease of access foreigners have to invest in local bonds.

Currently, foreigners own 37% of outstanding government bonds – this compares well with emerging market peers with comparatively deep, liquid financial markets:

Foreign holdings of government debt. Source: Futuregrowth

“Consequently, while South Africa’s economic outlook hasn’t looked gloomier in the post-democratic era, it is still too early for the ignominious calls for external debt relief from the IMF,” says Futuregrowth.

“Significant time has been wasted, trust eroded and economic damage caused in the past decade, but there remains a brief window of opportunity for policy makers to swallow the bitter pill that is fiscal probity and resolutely enact growth-enhancing structural reform – South Africa’s sovereignty depends on it.”

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