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SA secures climate loans at fraction of market rates

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Some of the loans South Africa secured as part of an $8.5 billion climate finance package will cost a fraction of what it would have paid commercial lenders and will cut the country’s future borrowing costs, Finance Minister Enoch Godongwana said.

“When we get these loans, in fact they are between 500 and 400 basis points lower than we would have paid in the market,” Godongwana said in an interview in Johannesburg on Thursday, without being more specific. “We would have raised that money anyway.”

The yield on South Africa’s 10-year dollar debt is 7.72%, and on its 10-year rand-denominated bonds about 11%.

South Africa’s interest bill has risen after ratings companies stripped the country of its investment-grade status, driving up the rate it has to pay on its debt, and as it took on additional loans to fund its budget deficit. If it hadn’t had the loans at preferential rates South Africa would have had to raise the money at market rates, he said.

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The funding deal includes $2.77 billion in loans at concessional rates from the European Investment Bank, France and Germany as well as an additional $2.56 billion in concessional loans from the World Bank-affiliated Climate Investment Funds, according to a copy of the investment plan that has been signed off by South Africa and its investment partners. Most of the rest comes in the form of commercial loans and debt guarantees provided by the US and UK. About $330 million will be in the form of grants.

Godongwana was referring to the interest rates paid on the concessional loans, his office said in response to a query.

The bulk of the climate funding will be used to bolster electricity production as state utility Eskom Holdings plans to close many of its dilapidated coal-fired power plants in coming years.

Energy shortages have been a major constraint on Africa’s most industrialised economy, with Eskom subjecting the nation to intermittent blackouts because it can’t meet electricity demand. The utility also doesn’t generate enough income to cover its operating and financing costs, prompting Godongwana to last month announce plans for the government to assume between one-third and two-thirds of its approximately R400 billion of debt.

Details of the bail-out should be finalised by the time of the next budget in February. The quantum of aid will in part hinge on the tariff increases Eskom is allowed by the energy regulator and its strategy to replace old power stations, Godongwana said.

“We need to finalise how much of Eskom’s debt we are going take, and over what period are we going to take on the debt,” he said. The quantum of debt the government takes on “should not disrupt the debt-to-GDP ratio and the deficit figures,” he said, referring to the government’s balance sheet.

Godongwana also highlighted the need to improve the performance of Transnet , which operates the nation’s ports and freight rail network. A lack of capacity at the state-owned company has hindered crucial exports such as coal.

“We have got to get private participation, that will take time,” and in the meantime Transnet will require additional funding, the minister said. “The revenue we are losing by not having those things right is more than the money spent to fix Transnet.”

© 2022 Bloomberg

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