SA has scope to borrow – it just needs to make sure it can pay everything back

South Africa’s biggest challenge in the post Covid-19 world will be its ability to grow, but the pandemic might just provide the impetus required to implement structural reforms.

“We do not have debt problem in South Africa, we have a growth problem. If the economy was growing, we would have more tax revenue and the ability to service debt,” Leslie Maasdorp, chief financial officer of the New Development Bank (NDB) said in a webinar hosted by Deloitte on Wednesday.

South Africa is currently in talks with international financial institutions – the IMF, World Bank and the NDB to access R95 billion, which will go toward a R500 billion Covid-19 support package, announced by President Cyril Ramaphosa two weeks ago. These funds will purely be used by the country to manage the Covid-19 crisis.

The NDB, established in 2014 by the founding members of the BRICS grouping of nations, is currently finalising a $1.5 billion loan to South Africa, as well as loans to other BRICS member countries.

The lockdown, instituted in the last week of March, has halted economic activity. Earlier this week on a conference call with Goldman Sachs, Finance Minister Tito Mboweni said that the economy could contract as much as 6.4{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} and the budget deficit could balloon to 10{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2}, up from 6.8{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} Treasury previously projected.

The SA economy could rebound next year, provided that significant structural changes are implemented.

The structural reforms required to stimulate economic growth have already been outlined by ratings agencies, and in government’s own plans. The challenge is implementing these reforms – such as opening up the energy industry to enable participation of independent power producers and introducing efficiencies in state-owned enterprises which are a drain on the economy.

“We have no option but to implement reforms during this time,” said Maasdorp.

Montfort Mlachila, IMF senior resident representative of South Africa, similarly shared views that a country’s growth rate matters a lot when it comes to servicing debt costs. If growth rates are higher than the interest rate of debt borrowed, then higher levels of debt servicing costs will be paid. 

Debt relief

The IMF has waived or cancelled the debt servicing costs of the most vulnerable, low income countries for the next six months with the hopes that the arrangement will be extended to two years. To do this though, the IMF relies on subsidies from wealthier countries and not all of the have committed, Mlachila said. The G20 recently agreed to a temporary debt standstill for bilateral debt, AFP previously reported.

Maasdorp shared views that the complete suspension of debt service would have implications for the credit rating of multilateral institutions and by extension the cost of their loans. It would become more expensive for countries to borrow from these institutions.

“We have a highest creditworthiness because of preferred credit status… The moment we suspend debt service to multilateral banks, we will forego that principle of preferred creditor treatment that has been in place in the last several decades. That may be rating sensitive,” Maasdorp said.

Growing risk of deglobalisation

Another risk during this time is that a lot of countries are looking inward, with some policymakers taking on a more protectionist approach, Maasdrop said.

A growing trend of deglobalisation will have implications for value chains – particularly when it comes to food security in emerging markets. 

“The breakdown in the global supply chain will have a massive impact on economies in the BRICS countries and other emerging markets,” he said.

However, CEO of Siemens Southern and Eastern Africa, Sabine Dall’Omo, said that the deglobalisation trend may create an opportunity for innovation within Africa. “I see a significant change to local components and localisation in value chains, to bring things back home,” said Dall’Omo.

Particularly in South Africa, there is an opportunity to manufacture basic equipment such as personal protective equipment and ventilators to be exported to the rest of Africa, at an affordable rate, she said.

The continent can leverage off the African Continental Free Trade Agreement at this point to work together in strengthening their industries and developing new supply chains. “This is a great opportunity. As businesses, we need to put everything into it” said Dall’Omo.

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