By Lehlohonolo Lehana.
South Africa has signed loan agreements with France and Germany worth R10.7 billion (€600 million) to assist in its efforts to move away from coal and increase its reliance on cleaner energy.
Each of the European nations have committed R5.4 billion (€300 million) in concessional financing through the French and German public development banks, the AFD and KfW, respectively. The loans have been provided directly through the National Treasury department.
“The loans are highly concessional as their terms are substantially more generous than what the government of South Africa would be able to raise in capital markets,” said Treasury.
The Treasury explained that the estimated cost for the government of South Africa to raise an equivalent loan today in the market would be around 8.9% – considering fair value estimation of South Africa’s foreign currency bonds relative to the risk-free rate, secondary market activity, and historical issue spreads.
“Due to South Africa’s high stock of debt and the currently high-interest rate environment, replacing market lending with much cheaper concessional loans allows South Africa to reduce its cost of funding and overall debt burden.
“By lowering debt service costs, the government of South Africa creates more fiscal space for critical social and other priorities,” said Treasury.
The department added that these loans are already reflected in South Africa’s gross borrowing requirement and are well within South Africa’s risk benchmark of foreign debt as a percentage of total debt.
These loans form part of an international funding package of $8.5 billion (R147 billion), known as the Just Energy Transition Partnership (JETP), pledged to SA by France, Germany, the UK, the US and the EU at COP26 in November 2021.
Although 97% of the R147 billion is expected to be offered in the form of loans, it is still unknown what the terms will be – especially regarding those offered by the UK, the US and the EU.
However, while this funding is welcomed, it is only a small drop in the ocean of what experts estimate South Africa will need to fully realise its transition goals.
President Cyril Ramaphosa, during a speech at the COP27 summit in Egypt this week, said that the country needs close to R1.5 trillion ($86.5 billion) to reach its energy transition goals.
Despite this, the National Treasury said that this funding as part of the JETP is a notable step in attracting further investment – creating new industries and jobs, which will help South Africa to achieve energy security and climate resilience.
“South Africa requires more support for its just energy transition given the large scale of the required transition in the context of the current socio-economic challenges and will therefore continue discussions with various multilateral lenders to pursue this objective, “said Treasury.