- South Africa's R70bn loan from the IMF will be paid back a very low interest rate - only 1.1%.
- However, the loan is in dollar - if the rand tanks, that could spell trouble
- Economists says SA ran out of options for financing.
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South Africa has received a $4.3 billion (R70 billion) International Monetary Fund (IMF) loan at very generous terms.
According to Bloomberg, it accrues only 1.1% interest. It’s payable over 3.25 to 5 years, and the first payment is due in 2023.
But there's one risk: it's in dollar.
Hugo Pienaar, chief economist at the Bureau for Economic Research, says he's confident the government will be able to repay the loan, but if the rand tanks, that loan becomes much harder to pay back. “It’s not an interest rate risk – it’s an exchange rate risk.” Theoretically, the risk may be small: the rand is already the world's most under-valued currency, according to The Economist's Big Mac Index.
But the rand remains vulnerable and highly volatile - earlier this year it almost reached R20/$. It's currently trading at around R16.50/$.
The ANC government has long been opposed to approaching multilateral institutions like the IMF or the World Bank for help on the grounds that it undermines the sovereignty of the country. The IMF, as a “lender of last resort”, has strict requirements for financing, including economic policy reforms.
But this loan does not comes with structural conditions attached. Instead, the loan will be issued through a “rapid financing instrument” used to help alleviate the damage of the coronavirus on economies.
Pienaar says the government ran out of options for financing. “There’s this idea that you have a choice to go to the IMF. You don’t,” he said.
“The government’s fiscal position is so dire, and the financing requirements so high, that local capital markets wouldn’t be able to meet it.”
“Covid-19 and the subsequent lock-down have led to large contractions in South Africa’s GDP and tax revenues in 2020. As a result, the budget deficit will widen to 14% of GDP,” says Nazmeera Moola, head of SA Investments at Ninety One.
The government could have turned to local markets and issued ten-year bonds to try and get the money but “the sheer size of the borrowing requirement this year means that the deficit cannot easily be financed in the local bond market,” says Moola. Last month, finance minister Tito Mboweni estimated that government faces a revenue shortfall of R300 billion this year.
In addition, the yield on ten-year bonds, currently at just over 9%, would make the debt much more expensive than the 1.1% interest the IMF is offering.
But here’s the catch: This IMF loan is pretty generous. The next one won’t be.
According to Moola “it is imperative that South Africa implements reforms to boost growth and rein in government spending in the next year. If not, then further funding will be required from multilateral institutions – and those loans will have far more stringent conditions attached.”
The IMF has already said as much. In its statement, it warned South Africa that “there is a pressing need to strengthen economic fundamentals and ensure debt sustainability by carrying out fiscal consolidation, improving the governance and operations of SOEs, and implementing other growth-enhancing structural reforms.”
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