HILARY JOFFE: SA places Africa’s debt in G20 spotlight

After December’s first round of Group of 20 (G20) meetings, SA is gearing up to host a second round of high-level meetings next month, with the finance track ministerial at the Cape Town convention centre and the foreign ministers’ meeting at Nasrec.

Investec’s hosting of the sherpa and finance track meetings in December will be hard to match, with its 3,500 proteas on spectacular display, along with quality coffee, sushi and service. Government folk were rather blown away by it all. And international relations & co-operation director-general Zane Dangor didn’t seem entirely comfortable with all the thanking he had to do to the private sector hosts, who provided an experience in stark contrast to that of visiting the department’s cavernously unfriendly building. Perhaps it might provide a different model for the government as it readies to host this year’s 130 official G20 meetings.

If the logistics are complicated the content is way more so. And even items on the sprawling G20 agenda that look relatively uncontroversial can be contested. Take debt, an issue SA has put at the centre of its efforts to bring an African focus to the agenda. The debt crisis facing many developing countries is not a new one for the G20, but SA has put it high on its list of objectives.

Notably, Dangor’s boss, minister Ronald Lamola, zeroed in on the high cost of capital, reportedly saying the G20 planned to establish a commission to address this. But one might ask why the foreign minister, rather than the finance minister, is talking about Africa’s sovereign debt crisis. One might wonder, too, whether the “cost of capital” language positions the issue as one in which Africa is the victim of foreign lenders and credit ratings agencies, rather than a broader problem of poor domestic governance and inadequate international institutions.

It is true that the cost to countries of servicing their debt is often more of a disaster than the level of debt. Few would argue that many African countries are unable to sustain the debt they’ve taken on. They’ve relied increasingly on foreign bond market or bank debt, rather than on aid or concessional financing. That’s expensive money anyway, but when exchange rates and export revenues crash they can, and often do, default.

Even when they don’t, their debt service costs crowd out their ability to spend on social and economic development, and on climate change. SA’s public debt costs consume a fifth of government tax revenue; in some African countries the amount is half or more, and they rely far more heavily than we do on foreign financing. Africa’s external debt has doubled in the past decade, growing from 75% of exports in 2010 to 140% in 2022. UN figures show 23 countries spend more on debt service than on health and education.

Holistic approach

The IMF has sounded the alarm on debt distress in low-income countries, particularly in Sub-Saharan Africa. So has the G20. And though these institutions have led efforts to restructure debt for countries that default, restructuring is usually prolonged, difficult and economically damaging.

It makes sense for SA’s presidency to foreground the issue; what’s at issue is how it’s taken up, and by which arm of the G20. Tart comments in a media statement the National Treasury issued after December’s finance track meetings hint at tensions. The cost of capital is indeed a constraint on growth and development in Africa and other developing countries, and needs reviewing, it says. But “with its long-standing expertise and track record of work on issues influencing the cost of capital, the finance track will anchor the review”, says the statement, emphasising it will take a holistic approach.

The finance track is the original G20 forum of central bank governors and finance ministers who came together in the emerging markets crisis of the late 1990s. What’s now called the sherpa track came later, when the G20 became a forum for the countries’ prime ministers and presidents in the 2008 global financial crisis.

Confusingly perhaps, Dangor is the sherpa, or chief organiser, of the sherpa track. But Treasury director-general Duncan Pieterse and Reserve Bank deputy governor Rashad Cassim are the sherpas for the finance track, whose finance ministers and central bank governors meet next month.

And while forums of foreign ministers and others report into the sherpa track, the finance track does not. It remains a parallel track focused on global economic and financial policy issues. It has long worked on concrete measures to reform multilateral institutions such as the World Bank and IMF to give more voice to developing countries and provide more concessional financing for them. That is a priority again this year, with finance minister Enoch Godongwana talking of bigger better multilateral development banks.

Self-help

So too are efforts to get the debt restructuring process to work better. Crucially, as SA’s finance track leadership has emphasised, that addressing the debt crisis is also about supporting countries to do some self-help; developing local currency markets so they don’t have to rely as much on international borrowing; as well as implementing reforms so they can grow faster, run their public finances better and ensure they can afford the debt they take on. The focus is also on how to raise more private capital and derisk it, as well as on cross border payments systems that could boost intra-African trade and development.

The language of this holistic approach is not a “cost of capital” one. That tends to reflect a politics, pushed by some African leaders, which charges that the global credit ratings agencies rate many developing countries as more risky than they really are, and that markets charge African countries particularly high prices for their debt.

The IMF itself has pointed to an “Africa risk premium”. The continent’s countries pay higher interest rates on their bonds than peers from other regions with similar ratings, it found in a 2023 study. Crucially, however, the study found this premium vanished if one stripped out the acute challenges African countries faced with budget transparency, the size of the informal sector, the level of financial development and the quality of public institutions.

Likewise, a former senior S&P analyst, Moritz Kraemer, found that African countries had defaulted on their debts significantly more often than similarly rated peers. Writing in the Financial Times, he suggested that far from being too harsh, the ratings agencies might be too kind.

The bottom line is that African countries need to implement their own reforms to make themselves more attractive to investors and lenders, and thereby less likely to run into debt default. SA should know that better than most, and it has lessons to share. Of course African countries, SA included, need far more development and climate finance from richer countries, on more affordable terms, than they are getting now.

As G20 host SA is well placed to lead the push for reforms and innovation, globally and on the continent, to enable that. As “Team SA” heads off to the World Economic Forum next week, bankers and government can do so there too.

• Joffe is editor-at-large.