Odious debt, hopeless theory

The debt cancellation lobby is chasing a chimera.

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.