Odious debt, hopeless theory
THE RECENT COLLAPSE in the value of the
Rand coupled with ever higher interest rates ought to make Sangoco, the
coalition of South African NGOs, and Cosatu realise just how hopeless
is their flirtation with the cause of debt cancellation. They reason
that since it was the apartheid state that ran up odious debts,
therefore we can reject the country’s debts. And since debt repayment
accounts for 21 per cent of the national budget, reneging on it will
give us 21 per cent more to spend and soften the dire effects of
government economic policy. Nice try but bad theory.
True, F.W. de Klerk bequeathed Mandela a much swollen national debt.
In 1989 when de Klerk came to power it stood at R79.9 billion. But it
was in the years after that, when apartheid was completely dismantled,
that the debt exploded. In 1994 when the ANC took over it was R192.2
billion, and only a fraction of that had been spent on the forces of
oppression. What really inflated the debt was de Klerk’s huge extra
spending, not on defence — which was cut to the bone — but on the
homelands, pensions and public-sector pay increases, particularly for
schoolteachers. The unions cheered this on and even demanded more, so
presumably this debt-increasing policy did not seem too odious at the
time. Indeed, it is precisely because teachers had benefited from such
salary inflation that education minister Sibusiso Bengu realised he
could not afford them and offered them packages to go.
To the R192.2 billion, must be added a mountain of homeland debt when
the bantustans were reincorporated and Namibia’s debt which the new
government forgave. But the national debt has continued to mount under
ANC rule - it is expected to reach R478 billion by 2000 - because this
government, too, has been borrowing merrily away. It has even sent
ministers Trevor Manuel and Alec Erwin on special bond-selling (ie
loan-taking) tours of Europe. The art of funding a country’s debt lies
in attaining the longest maturity dates and the thinnest spreads — the
margin above the “risk-free” London Inter-Bank Offer Rate (Libor). In
this respect the government has done well: it has managed continuously
to lengthen the maturity and lower the spread on its bonds so that,
outside the developed world, only Brazil and China are receiving better
terms on their debt.
If the call for debt cancellation was taken seriously by the markets,
South Africa’s maturities and spreads would worsen, so that existing
debt would cost the country a lot more. That is, the more the anti-debt
lobby succeeds, the more it must fail. Moreover, the Rand and JSE would
collapse catastrophically and interest rates would be forced ever
higher in order to staunch the flow of foreign investment leaving the
country.
In addition bankers would react with particular fury against a
defaulting middle-income country that had persuaded them it was a good
risk and cut off all future credit. Much poorer countries, such as
North Korea, who thought that they could get away with such behaviour
have found these consequences more painful than the situation they were
trying to escape.
In fact, South Africa’s debts are not so painful: our debt service
ratio for foreign debts (ie debt payments as a proportion of exports)
is 9.4 per cent compared to the all-Africa average of 23 per cent. Even
if domestic debt is included, the total is still affordable. What makes
the repayment of domestic debt so painful are the country’s high
interest rates. But none of this is likely to cut much ice with the
debt-cancellation lobby, which will continue to chase its chimera.