South Africa searches for a financial parachute, now that a $170 billion foreign debt cliff looms

18 December 2018 by Patrick Bond


Johannesburg, South Africa (CC - Flickr - Chris Eason)

Johannesburg – This week’s hush-hush visit by International Monetary Fund Managing Director Christine Lagarde to Pretoria (between stops in Ghana and Angola) is mysterious. In contrast to last week’s IMF press briefing claim – “Madame Lagarde will hold meetings with the authorities, as well as fairly extensive meetings with the private sector, civil society, academia, women leaders, and of course the media” – there’s a complete information void here, with no public events scheduled.

An open, frank public discussion about the IMF IMF
International Monetary Fund
Along with the World Bank, the IMF was founded on the day the Bretton Woods Agreements were signed. Its first mission was to support the new system of standard exchange rates.

When the Bretton Wood fixed rates system came to an end in 1971, the main function of the IMF became that of being both policeman and fireman for global capital: it acts as policeman when it enforces its Structural Adjustment Policies and as fireman when it steps in to help out governments in risk of defaulting on debt repayments.

As for the World Bank, a weighted voting system operates: depending on the amount paid as contribution by each member state. 85% of the votes is required to modify the IMF Charter (which means that the USA with 17,68% % of the votes has a de facto veto on any change).

The institution is dominated by five countries: the United States (16,74%), Japan (6,23%), Germany (5,81%), France (4,29%) and the UK (4,29%).
The other 183 member countries are divided into groups led by one country. The most important one (6,57% of the votes) is led by Belgium. The least important group of countries (1,55% of the votes) is led by Gabon and brings together African countries.

http://imf.org
’s regrettable history and current agenda is sorely needed, in a context where a few honest politicians and officials are belatedly struggling to reverse what is termed “state capture” and return stolen funds to the taxpayer. Undoing a decade of looting by former President Jacob Zuma and the Gupta empire (three immigrant brothers plus hundreds of hangers-on) is no small task.

Hence it is perhaps with discomfort that Lagarde will meet one of the main post-Zuma/Gupta leaders, Finance Minister Tito Mboweni, who twice (in 2013 and 2016) tweeted of ‘negligence’ for gifting $430 million to a tycoon – Adidas founder Bernard Tapie – who donated to her Conservative Party when she was finance minister (in 2017 he was forced to pay back the French state).

Retribution for corruption is indeed in the Pretoria air. Two months ago, Mboweni replaced Nhlanhla Nene, who resigned in disgrace over lying about his secret Gupta meetings. But is Mboweni himself arranging a secret bailout deal, as happened in December 1993 when the IMF granted an infamous $850 million loan – a “Faustian Pact” (according to former Minister of Intelligence Ronnie Kasrils) replete with Washington Consensus promises – to outgoing president FW de Klerk, so as to “instil global financial confidence” in the incoming Mandela government?

After five “junk!” denunciations of South Africa by the three most powerful (albeit suspect) credit ratings agencies over the past 18 months, President Cyril Ramaphosa has tried hard to restore their trust. However, with the giant energy parastatal agency Eskom now trying to dump another $7 billion in debt onto a severely-stressed national Treasury, does Ramaphosa need a financial back-stop from the Bretton Woods Institutions?

Indeed, more to the point, is Eskom’s foreign debt again creating havoc, as happened in January with a “pending letter of default from the World Bank World Bank
WB
The World Bank was founded as part of the new international monetary system set up at Bretton Woods in 1944. Its capital is provided by member states’ contributions and loans on the international money markets. It financed public and private projects in Third World and East European countries.

It consists of several closely associated institutions, among which :

1. The International Bank for Reconstruction and Development (IBRD, 189 members in 2017), which provides loans in productive sectors such as farming or energy ;

2. The International Development Association (IDA, 159 members in 1997), which provides less advanced countries with long-term loans (35-40 years) at very low interest (1%) ;

3. The International Finance Corporation (IFC), which provides both loan and equity finance for business ventures in developing countries.

As Third World Debt gets worse, the World Bank (along with the IMF) tends to adopt a macro-economic perspective. For instance, it enforces adjustment policies that are intended to balance heavily indebted countries’ payments. The World Bank advises those countries that have to undergo the IMF’s therapy on such matters as how to reduce budget deficits, round up savings, enduce foreign investors to settle within their borders, or free prices and exchange rates.

” that “could trigger a recall on Eskom’s $25 billion debt mountain,” as Carol Paton reported in Business Day? (Ramaphosa’s urgent meeting with Bank officials in Davos the next day was apparently temporarily soothing.)

Lagarde’s opaque visit contrasts with World Bank President Jim Yong Kim’s high-profile trip earlier this month, amidst a blaze of Global Citizen anti-poverty populism to 90,000 youth at a Soweto stadium: “I’m telling you, you can’t trust anyone over 30 to determine your future!”

Kim also met Ramaphosa to discuss, he tweeted, urban planning and sanitation (neither of which would need US$-denominated Bank loans). He also lectured at the Wits University School of Governance about human capital investment, at one point jovially criticising another ex-lefty, his host, Vice Chancellor Adam Habib, for being a “student of Trotsky.”


Ramaphosa: “We’re not looking at the IMF. The New Development Bank has a facility…”

Are loans to South Africa from the IMF and World Bank really needed? On the one hand, their leaders are here in the wake of July’s Brazil-Russia-India-China-SA Johannesburg summit, which again raised hopes for the BRICS bloc’s international financial governance reform agenda.

For example, notwithstanding angry protests by environmental justice activists at its Africa Regional Centre office, the BRICS New Development Bank (NDB) quickly announced loans to three local parastatal agencies. One of these, Eskom’s $180 million, had been “in abeyance” since 2016 due to then-CEO Brian Molefe’s second thoughts: he opposed the loan’s linkage of privatised renewable energy to Eskom’s grid (instead, Molefe wanted to take on more nuclear debt, which Mboweni – then an NDB director – had publicly endorsed in 2015, while in Russia at that year’s BRICS summit).

The other credits went to Transnet’s Siyabonga Gama (fired for Gupta-related corruption a few weeks later) for $200 million to expand the Durban port-petrochemical complex – a project now frozen due to brazen procurement fraud involving a notorious Italian firm (unrelated to the Guptas) – and the Development Bank of Southern Africa for on-lending $300 million to municipalities (assuming there are any creditworthy ones left, able to pay sufficiently high interest rates Interest rates When A lends money to B, B repays the amount lent by A (the capital) as well as a supplementary sum known as interest, so that A has an interest in agreeing to this financial operation. The interest is determined by the interest rate, which may be high or low. To take a very simple example: if A borrows 100 million dollars for 10 years at a fixed interest rate of 5%, the first year he will repay a tenth of the capital initially borrowed (10 million dollars) plus 5% of the capital owed, i.e. 5 million dollars, that is a total of 15 million dollars. In the second year, he will again repay 10% of the capital borrowed, but the 5% now only applies to the remaining 90 million dollars still due, i.e. 4.5 million dollars, or a total of 14.5 million dollars. And so on, until the tenth year when he will repay the last 10 million dollars, plus 5% of that remaining 10 million dollars, i.e. 0.5 million dollars, giving a total of 10.5 million dollars. Over 10 years, the total amount repaid will come to 127.5 million dollars. The repayment of the capital is not usually made in equal instalments. In the initial years, the repayment concerns mainly the interest, and the proportion of capital repaid increases over the years. In this case, if repayments are stopped, the capital still due is higher…

The nominal interest rate is the rate at which the loan is contracted. The real interest rate is the nominal rate reduced by the rate of inflation.
to justify a hard-currency loan for local infrastructure).

Explained Earthlife Africa protester Makoma Lekalakala, co-winner of the 2018 Goldman Environmental Prize as Africa’s leading activist this year, “Both Eskom and Transnet are under scrutiny for corruption and mismanagement. No due diligence was done on the Transnet loan. If this is how the [BRICS] bank operates, we have to brace ourselves for accelerated environmental degradation for the pursuit of profit Profit The positive gain yielded from a company’s activity. Net profit is profit after tax. Distributable profit is the part of the net profit which can be distributed to the shareholders. .”

But the Bretton Woods Institutions are no better, and just over a year ago, Ramaphosa offered a scathing critique of Washington’s bias: “We should not go to the IMF because once we do we are on a downward path, we will be sacrificing our independence in terms of governing our country and sacrificing our sovereignty.” He cited the risk of imposed “cuts in social spending” what with anticipated IMF orders to Eskom “to do away with free electricity quotas for the poor and indigent.”

Ramaphosa repeatedly denies that the Bretton Woods Institutions will bail out South Africa: “IMF, no, we’re not looking at the IMF. The New Development Bank has a facility that could be made available to us. And we are exploring that as well. And we want to do it in a way that does not require a sovereign guarantee.” Actually, Ramaphosa probably didn’t mean the BRICS NDB, which makes project-specific loans, but instead its $100 billion Contingent Reserve Arrangement (CRA), which offers a $3 billion credit line for South Africa to immediately draw upon, in the event of a balance Balance End of year statement of a company’s assets (what the company possesses) and liabilities (what it owes). In other words, the assets provide information about how the funds collected by the company have been used; and the liabilities, about the origins of those funds. -of-payments emergency deficit.


BRICS v IMF – or BRICS-IMF?

On the other hand, the BRICS look much less coherent today than in July, because Brazil’s new leader Jair Bolsonaro could drop out of the bloc, and at minimum, will more firmly hitch his regime to Donald Trump’s. Yet in spite of oft-expressed Sinophobia, Bolsonaro has just grudgingly agreed to continue the rotation of BRICS heads-of-state summit hosting (although this is likely only to occur in Brasilia next November). There will be much Trump-style geopolitical, economic and especially environmental chaos starting on January 1 when he becomes president, such as paving over the Amazon. But compared to November, fewer insiders I talked to on a visit earlier this month (including former Foreign Minister Celso Amorim) fear that Bolsonaro will reduce the bloc to RICS through a “Braxit,” the way he just did to the UN Framework Convention on Climate Change summit. (His predecessor Michel Temer had agreed to host it in Brazil late next year, but Chile will now take over.)

The oft-stated contrast between the agendas of BRICS and Washington, as articulated by Zuma’s scribe Gayton Mckenzie, for instance, was in any case mainly myth. From 2014, Lagarde has enjoyed the power to co-finance the more desperate of BRICS borrowers (not just SA, but also Brazil and Russia suffer junk status), because the CRA’s Articles of Agreement stipulate that if Pretoria (or any other borrower) wants the next $7 billion in BRICS funding within its $10 billion CRA quota range, it must first get an IMF structural adjustment Structural Adjustment Economic policies imposed by the IMF in exchange of new loans or the rescheduling of old loans.

Structural Adjustments policies were enforced in the early 1980 to qualify countries for new loans or for debt rescheduling by the IMF and the World Bank. The requested kind of adjustment aims at ensuring that the country can again service its external debt. Structural adjustment usually combines the following elements : devaluation of the national currency (in order to bring down the prices of exported goods and attract strong currencies), rise in interest rates (in order to attract international capital), reduction of public expenditure (’streamlining’ of public services staff, reduction of budgets devoted to education and the health sector, etc.), massive privatisations, reduction of public subsidies to some companies or products, freezing of salaries (to avoid inflation as a consequence of deflation). These SAPs have not only substantially contributed to higher and higher levels of indebtedness in the affected countries ; they have simultaneously led to higher prices (because of a high VAT rate and of the free market prices) and to a dramatic fall in the income of local populations (as a consequence of rising unemployment and of the dismantling of public services, among other factors).

IMF : http://www.worldbank.org/
programme.

If Pretoria needs financing to repay increasingly onerous foreign debt tranches in 2019, could this fractured society withstand IMF austerity, given what Business Day already termed 2018’s “savage fiscal consolidation”? Radically-reduced funding for basic infrastructure left even a confirmed neoliberal, Johannesburg Mayor Herman Mashaba, crying foul on Treasury’s 65% budget cut to the city’s housing program last week.

At the global scale, the BRICS financial institutions are not up to the massive bailout requirements necessary if financial meltdowns similar to 1998 and 2008 reappear in coming weeks, for instance due to Britain’s anticipated “hard crash” from the European Union on March 29. In even the recent weeks’ relatively mild economic turmoil, South Africa’s currency was the world’s most volatile (out of the 31 most traded). The Rand continues to zigzag in part because of then Finance Minister Malusi Gigaba’s February 2018 relaxation of exchange controls on $43 billion worth of local institutional investor funding that can now depart South Africa. (That puts into context the oft-remarked $7 billion exit threat from Citibank’s World Government Bond Bond A bond is a stake in a debt issued by a company or governmental body. The holder of the bond, the creditor, is entitled to interest and reimbursement of the principal. If the company is listed, the holder can also sell the bond on a stock-exchange. Index once Moody’s finally drops the junk axe on the domestic-denominated securities rating.)

However, while we continue to pay close to a 9% hard-currency interest Interest An amount paid in remuneration of an investment or received by a lender. Interest is calculated on the amount of the capital invested or borrowed, the duration of the operation and the rate that has been set. rate on 10-year state bonds (even higher than does Venezuela), there will be willing buyers – until the next world financial melt ratchets rates even higher. And in spite of BRICS babble about IMF reform so as to lessen the load of borrower conditionalities, there have been no changes in economic philosophy under Lagarde. Worse, Africa lost substantial voting power in the last quota restructuring, in 2015, including Nigeria by 41% and South Africa by 21%. The main countries that raised their respective IMF shares were China (35%), Brazil (23%), India (11%) and Russia (8%).


An alternative strategy: repudiation of corrupt bankers

IMF reform that leaves most Africans with less voice is better considered deform, Ramaphosa himself seemed to concede in a speech to the United Nations in September, complaining that the IMF and other multilateral institutions still “need to be reshaped and enhanced so that they may more effectively meet the challenges of the contemporary world and better serve the interests of the poor and marginalised.”

Because their interests are not served by either Washington’s or the NDB’s lending to corrupt parastatal elites, the “poor and marginalised” need another strategy. Just as in the days of the Jubilee 2000 debt-repudiation movement, which was led in South Africa two decades ago by the late poet Dennis Brutus and Anglican Archbishop Njongonkulu Ndungane, it’s overdue we talk about, and indeed audit, South Africa’s foreign debt.

Including parastatal and private borrowers (for whom the state ensures hard currency is available for repayment), foreign debt stood at $171 billion as of mid-year (up from $25 billion in 1994). That figure, the SA Reserve Bank announced last week, is down nearly 8% from March 2018’s $183 billion, but only as a result of “non-residents’ net sales of domestic rand-denominated government bonds as well as valuation effects.”

The main foreign debtors remain Eskom and Transnet. They have contracted, over the past eight years, South Africa’s three largest-ever loans:

None of these loans can be justified, especially on ecological grounds – since they all rapidly increase the climate debt we South Africans owe both future generations and, more urgently, contemporary African victims of worsening droughts and floods. Moreover, with state procurement corruption costing in the range of 35-40% per contract, according to the lead Treasury official in 2016, there is a strong case for a full debt audit, followed by the demand that the World Bank, China Development Bank, BRICS Bank and other lenders also assume liability.

After all, the Hitachi deal with the ANC’s investment wing Chancellor House led the U.S. government to fine the Japanese firm nearly $20 million in 2015 – for Foreign Corrupt Practices Act violations at Eskom – and hence when Public Enterprises Minister Pravin Gordhan (responsible for borrowing the $3.75 billion in 2010) last week blamed Hitachi incompetence for recent load-shedding, that alone should invoke World Bank debt repudiation.

Jim Kim should not only have addressed this largest – and perhaps worst – loan in his institution’s history. The Bank’s portfolio also includes the largest share in the notorious CPS-Net1 “financial inclusion” strategy to rip off millions of poor South Africans, and a $150 million debt+equity stake in Lonmin which until just before the 2012 Marikana massacre (not long after Kim became president) the Bank was celebrating as a best-case for corporate social responsibility.

Add to all this the new threat of Faustian Pact 2.0 from the ethically-challenged Lagarde. The need for a new Jubilee movement is obvious. All existing anti-corruption initiatives should be pursued forthwith, but our ever lower expectations mean that a genuine ‘Ramaphoria’ – which if serious would include repudiation of the Gupta and ANC fraudsters’ financial facilitators, such as the World Bank, China Development Bank and BRICS Bank – is simply a fantasy. Instead, the meme best describing our current state of governance is, indeed, Ramazupta.



Patrick Bond

is professor of political economy at the Wits University School of Governance in Johannesburg and co-editor of BRICS: An anti-capitalist critique (published by Haymarket, Pluto, Jacana and Aakar).

Other articles in English by Patrick Bond (73)

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