While notoriously retrospective and usually late, the International Monetary Fund’s (IMF’s) reports need to be respected for their impartial, exhaustive and sober analysis. The IMF’s latest findings on Sub-Saharan Africa, published last week, did not make for easy reading. Entitled The Big Funding Squeeze, the fund is concerned that just as the embattled economies of southern Africa start to experience an interest rate-induced slowdown, critical global capital flows upon which they depend will dry up.
There are three interrelated factors coalescing to make the outlook particularly worrisome.
First, over the last 18 months global central banks have hiked interest rates more aggressively than at any time in the last four decades. Higher yields in US and European bonds mean that capital does not need to look towards riskier markets for a reasonable return. This has in effect shut emerging markets out of the USD bond market, with not a single sub-Saharan country having issued a dollar bond in the last year. An interest rate-induced global recession — which is still looking like a distinct possibility in late 2023 — will only accelerate this flight to safety.
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Second is China. The Asian powerhouse has been the most aggressive lender to emerging markets in the last decade under the $1-trillion Belt and Road Initiative, making China the world’s largest bilateral creditor. China has been particularly active in sub-Saharan Africa. Recent figures suggest, however, that these loans have become a financial millstone for Beijing and its biggest banks, with estimates from New York-based Rhodium Group showing that more than $78-billion of borrowings turned sour in the last year. These defaults are forcing China to pull back, just when its borrowers need funding the most.
Finally, the IMF is itself starting to run low on funds that it can commit to ailing economies. In her opening remarks at a recent IMF meeting, the IMF’s managing director, Kristalina Georgieva, noted that about 15% of low-income countries were already in “debt distress” and almost half were in danger of falling into it. This is on a completely unprecedented scale, which the IMF is not designed to accommodate.
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It is at these moments that countercyclical funding from the IMF and World Bank is most needed, but according to the IMF head for southern Africa, Abebe Selassie, “Our ability to continue to do this kind of emergency financing is now severely constrained.”
Georgieva warned last month that the lender’s Poverty Reduction and Growth Trust, which supports the poorest nations in the world, is in urgent need of replenishment.
South Africa has always been held to be relatively immune to such emerging market crises, given its deep domestic debt market, relative independence from foreign capital flows, and predominantly ZAR (as opposed to USD) denominated debt. Now one cannot be as sanguine.
First, the fiscal outlook is looking increasingly strained. Revenue from supercharged commodity prices was practically the only factor since the pandemic that provided some succour to the country’s bruised finances. With weaker global prices and South African production sharply lower because of infrastructure woes, this temporary relief is set to expire, just as the international context gets a lot more challenging.
Second, critical wage negotiations with unions have clearly gone the way of labour. Foreign investors will be all too aware that SA’s most important source of revenue, commodities, is falling just as its single largest drain, the excessive demands of state employees, is skyrocketing.
Finally, there is Eskom. While rolling blackouts were a handbrake on the economy through the summer, this winter risks nothing less than macroeconomic collapse under indefinite Stage 5 and potential Stage 8 load shedding.
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One should not be surprised if SA bonds and the ZAR become even more volatile and weaker than usual over the rest of the year and into 2024. In the last two months alone, the SA 10-year bond yield has risen from below 10.2% to almost 11.4% (yields move inversely to prices). The rand has weakened by more than 6% against the dollar this year, making it the worst performer in a basket of 16 major currencies tracked by Bloomberg. On the back of the commodity revenue windfall, the naysayers who have been predicting an IMF bailout for SA have until now been proved wrong. However, such is the deteriorating economic climate that there is no certainty they will continue to be wrong. DM/BM