Pity Ajay Banga. The new president of the World Bank, who started his job this week, will oversee a much-diminished organisation compared with that of the 1980s and 1990s.
Then, in the glory days of the Washington Consensus made famous by the cult book, “Confessions of an Economic Hitman”, the Bretton Woods institutions of the World Bank and the International Monetary Fund (IMF) were the long arm of America’s economic and political might, projecting its heft through macroeconomic policies enforced on the long-suffering Third World.
Terms such as “structural adjustment” and “conditionality” evoked contempt towards the US from many (including leftist economics grad students, as this columnist once was).
Much has changed. First, low interest rates have made World Bank and IMF funding far less alluring. Free money in effect opened up international capital markets to formerly barred sovereign borrowers. Why should a country like Zambia bother with the red tape and meddling from a World Bank loan when it can just raise a $750-million, 10-year Eurobond at a 5.375% coupon with zero conditions attached, as it did in 2012?
Second, China has long since surpassed the Bretton Woods institutions as the primary lender to the emerging world. According to data from the New York Times, China has extended almost $1-trillion of loans to 151 emerging markets in the last decade, making it by far the most important and influential creditor.
Finally, the BRICS countries have stated their desire to break free of the monetary and fiscal clutches of the West’s financial straightjacket.
Sanctions imposed on Russia following their invasion of Ukraine – which led to around $750-billion of foreign exchange reserves being in effect confiscated by the West – made clear the vulnerability of countries like China and India to the dollar. The greenback will not be replaced overnight, but its omnipresence will wane. As this happens, so will the centrality of the World Bank and IMF.
All of the above matters for South Africa. As long as sanity prevails in the National Treasury and at the SA Reserve Bank, the country is far from a default. However, the trend lines of its macroeconomic deterioration are clear.
Since 2010, SA government debt to GDP has ballooned from 26% to 71%.
It has gone from running a budget surplus in 2007 to consistent budget deficits of more than 4%. The cost of the SA government borrowing for 10 years has risen from under 7% in 2013 to almost 12.5%.
SA government one-year CDS, or the cost of insuring against its default, has gone from $7 in 2007 to $133.
Last week in its financial stability report, the SA Reserve Bank warned that local investors may be unable to take up the bonds dumped by foreign investors from 2019, especially with ever-higher volumes of issuance.
Given the realities of political mismanagement and endemic corruption, it is very hard to imagine how these trends will be reversed. If they are not, at some point in the future – be it in three, five or 10 years – South Africa will require emergency external funding in order to pay its bills.
If bankruptcy is assured, then the moment calls for clear-eyed realism.
Perennial Cassandras of SA’s political economy, like RW Johnson, have long predicted that the country will eventually be reduced to going cap in hand to the IMF and the World Bank for a bailout package. However, the ANC may be several steps ahead of such commentators.
Dewy-eyed observers like Johnson are stuck in the past, wedded to the context of the 1980s and 1990s. Times have moved on. There has been much confusion and even ridicule as to the SA government’s determination to side with its fellow BRICS members, especially China and Russia, much to the chagrin of the West.
How can SA possibly snub its most critical trading partners, such as the US and the EU, risking sanctions and economic ruin? The answer is that for the ANC, there is something far more important than trade and economic growth – and that is survival.
The ANC has realised that the Bretton Woods institutions do not enjoy the monopoly of being the lender of last resort to bankrupt sovereigns they once did.
When coffers run dry and the existing appetite for SA debt is exhausted, it will be critical to choose a lender willing to acquiesce to their overriding priority of staying in power at all costs, regardless of what any democratic process might say.
Why deal with the meddlesome, lecturing and patronising West when one can deal with emerging, autocratic powers who are altogether more indulgent of sclerotic post-liberation movements hellbent on hanging on to power?
The IMF and the World Bank were far from perfect.
Their structural adjustment and liberalisation policies supercharged the brutal realities of globalisation, impoverishing millions. However, South Africa’s economic collapse will force it into the clutches of some or other lender of last resort.
For those that value ideals such as democracy, free speech and the rule of law, being an indentured debtor to the likes of China will be a nightmare.
The ANC has chosen this endgame. DM