The government is in talks with the World Bank on a fresh $1bn loan, as part of a strategy to take advantage of cheaper loans from international financial institutions over the next three years rather than going back to foreign markets at a volatile time.
It is also looking to the $8.5bn Just Energy Transition (JET) Investment Plan agreed in November with SA’s international partners for concessional foreign finance, and has already signed contracts with French and German development finance agencies for €600m of low-interest loans which recognise the progress the government has already made on energy reforms.
A new World Bank loan would add to the more than $1.2bn of low-interest loans which the World Bank has granted the government over the past year, to support its Covid-19 response as well as economic reforms.
The Washington-based bank, whose president, David Malpass, visited SA on the eve of the COP27 climate conference in November, has also approved a $497m package to support
the repurposing of Eskom’s 60-year-old Komati coal-fired power station, whose last unit was shut down in October.
Treasury deputy director-general Duncan Pieterse said a new $1bn World Bank loan to the government would be a second development policy operation loan, along the lines of the $750m that the bank granted SA in January 2022.
Such loans in effect reward SA for progress and commitments already made, rather than being conditional on future action. “We are making the policy changes anyway. We might as well monetise it,” said Pieterse in an interview on Friday. “We are not making political choices in order to get the funding.”
This approach to lending in recent years has helped to avoid the kind of controversy that World Bank and IMF loans attracted in the past, when their conditionality raised questions about sovereignty. The French and German JET loans are also development policy loans, specifically linked to progress made on the energy transition, though the proceeds go towards general budgetary financing rather than being ring-fenced for particular projects. More such financing is pencilled into the investment plan from these countries as well as from the European Investment Bank.
The government needs to raise $2bn-$3bn in hard currency each year to meet foreign commitments, including servicing its existing foreign debt as well as for foreign payments on items such as embassies.
It successfully raised $3bn on the international bond market — the so-called Eurobond market — in April. But such funding tends to be more expensive and risky than the concessional, long-term loans available from international financial institutions, especially at a time when the global outlook is so uncertain and sentiment towards emerging markets so volatile.
Loan pipeline
The Treasury said in the medium-term budget that it would look to foreign loans for about R145bn of its total borrowing requirement of R1.3-trillion over the next three years.
Pieterse said the government’s request for a $1bn development policy operation from the World Bank was part of its efforts to change the mix of its medium-term funding: “Ideally we want a three-year pipeline of concessional lending that helps us stay out of the Eurobond market”, he said.
The Treasury would also be drawing down its high foreign cash balances to meet dollar payments and would also be using its foreign cash balances, rather than going back to the market.
“We keep getting asked by the market when we are coming back but we are saying ‘no thank you’. We are going to wait for things to settle,” Pieterse said.
Finance minister Enoch Godongwana is expected to present the budget in parliament on February 22.
After October’s medium-term budget projected better-than-expected deficit and debt figures, thanks mainly to tax collections again running well ahead of budget estimates, the market is watching closely to see what the Treasury’s December numbers will tell. December is one of the big months for corporate tax collections, so will be key to whether the tax overcollection trend has continued, even though commodity prices are off their peaks.
Market players will also be watching for details on how the $8.5bn JET investment plan is to be implemented, especially given the uncertainty in the energy sector.
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