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Why count out IMF funds when rating agencies want the same economic results?

21 Apr 2020

Sharon Wood / Daily Maverick


As South Africa’s policymakers put their heads together to come up with a big enough economic stimulus package to address the humanitarian crisis the country faces, they should be giving serious consideration to drawing on IMF funding.

This article was originally published in Daily Maverick.

The government has, so far, given in to the ANC and its allies’ strong aversion to IMF funding because of the economic policy strings that are usually attached to the loans extended by the fund.

However, is this not extremely short-sighted when South Africa faces a humanitarian crisis and the government has limited funding sources at its disposal? 

As all parties sit around the table putting together an economic package to deal with the economic crisis that faces the country, can the government afford to ignore the funding it could raise from the IMF? Particularly when the organisation has opened its door to an unprecedented level of funding specifically targeted to help hard-hit African countries. 

Although economists do agree that the IMF funding would come with economic conditions, the same is applicable when trying to achieve credit rating agencies’ investment-grade status. Striving to remain in investment-grade territory, economic policymakers have long been steering domestic economic policy towards achieving those same “conditions”. 

Futuregrowth research analyst Refilwe Rakale and interest rate market analyst Yunus January pinpoint the similarities in the economic and structural factors that the rating agencies and IMF take into account as fiscal sustainability, institutional strength, external account vulnerability and policy certainty. 

They add: “The conditionality is aimed at helping the country solve balance-of-payment problems, as well as any other structural issues that render the country’s financial system vulnerable.” 

Sanlam economist Arthur Kamp expands on this: 

“From a broad perspective, both the IMF and rating agencies want governments to run their government finances, financial system and external accounts sensibly to ensure fiscal sustainability, financial system stability and a sound balance-of-payments position.

“All of these together ensure that the government and the private sector in each country are in a sound position to meet their debt repayment obligations, whether in local or foreign currency. And, ultimately, when everything is weighed up, both the IMF and rating agencies want a country to remain on a sustainable debt trajectory.” 

He adds that since South African policymakers have always strived to run sound macroeconomic and macro-prudential policies, there should be no concern around IMF conditions – especially since IMF involvement is intended to help a country over a rough patch, with no intention of being prescriptive over the long run. 

The IMF and rating agency assessments do come from different vantage points. Rakale and January point out that rating agencies normally assign a rating based on how a country compares relative to peers, whereas the IMF would be likely to consider a country on a standalone basis. 

Old Mutual Multi Managers economist Dave Mohr agrees, saying rating agencies are making a point-in-time assessment of the state of the economy, but when countries approach the IMF they are already struggling. 

There is no doubt that the South African economy is struggling. Economic activity and confidence were already weak and in a worrying state before the pandemic struck. Now, millions stand to lose their jobs and small businesses are in extremely precarious positions notwithstanding the R1.2-billion stimulation package already put in place by the government. 

Mohr says he hasn’t been this worried about the economy for a long time and says South Africa will need to make use of any money it is offered. He points out that the $1-billion available from the BRICS bank only amounts to 0.3% of GDP versus the 7% average fiscal stimulus packages extended overseas. 

“We will need more,” he says. 

Government is well aware of this and, as Ray Mahlaka reported yesterday, is said to be looking to put together a R1-trillion stimulus package, which would amount to more than 19% of GDP – far higher than even the US package of 11% of GDP. 

“So it’s an enormous amount,” says Kamp. “However, this does not mean R1-trillion of stimulus. Much of it will probably be facilitating lending.” 

He points out that the relaxation of bank lending regulations already implies potentially “loosening” more than R300-billion in lending. 

“Who knows, this may be seen as part of the R1-trillion. But, will the banks lend in this uncertain environment? In that case, the state would need to supply guaranteed loans.” 

Kamp says it would also help if South Africa had access to cheap foreign funding from the IMF, World Bank and New Development Bank. 

Says Mohr: “What’s good about IMF funding is that there is quick money available at attractive rates. What’s bad about it is that it is dollar-denominated, so if the rand weakens the debt repayments go up.”

However, he points out that the rand is not overvalued because it has weakened so much already and that reduces the risk. Kamp notes that the government could hedge the currency aspect of the loans. 

Rakale and January say borrowing from these institutions allows South Africa to access stable funding that is cheap relative to domestic currency bonds. The lending rate under Special Drawing Rights is currently 0.08% plus a margin of 100 basis points. 

“This is highly attractive when compared to both domestic and foreign currency South African bonds.”. 

They say South Africa is most eligible for a Stand-By Arrangement (SBA) framework and that this programme would give South Africa access to between $6-billion and $18-billion (R108-billion to R325-billion). The downside is that it has a relatively short repayment period of 3¼-5 years after disbursement. 

“While the National Treasury has successfully financed the burgeoning funding requirement over the past decade with predominantly long-dated bonds, this still does pose some short-term redemption risk.” 

They acknowledge that there has been some concern about approaching institutions like the IMF because this could threaten South Africa’s sovereignty. But they add that following the Global Financial Crisis, the IMF relaxed conditions that members have to follow under the SBA. This has meant that SBA policies are now more responsive to specific member country’s needs. 

The government needs to weigh up its options carefully and without fear or favour. One of the options on the table is tapping into private-sector savings – a route that is likely to face resistance from various quarters. However, putting together a R1-trillion package is a massive and ambitious endeavour and could well require rallying funding from all possible sources. BM