A $15 Billion Trade for South Africa: Debt Relief for Climate

(Bloomberg) -- Politicians and academics are turning their attention to a new trade pitch for South Africa: debt relief in exchange for progress toward global climate goals. 

The debt-for-climate concept, which was floated by International Monetary Fund Managing Director Kristalina Georgieva in April, has been picked up by South African Deputy Finance Minister David Masondo and the South African Communist Party, which is part of the country’s ruling coalition. The IMF plans to raise the idea at the COP26 climate conference in Glasgow in November.

Backers of the proposal hope creditors can be persuaded that climate change is a global problem so urgent that it’s worth forgiving debts in developing nations to help them pay for costly transitions to cleaner energy. While such initiatives have been tried before, they’ve never been realized on the scale that South Africa would be seeking. 

The initiative would have multiple benefits for Africa’s biggest emitter of greenhouse gases. South Africa’s finances have been battered by its debt-ridden electricity company, Eskom Holdings SOC Ltd., which has required repeated bailouts and cash injections. The government is also seeking financing to switch Eskom from mostly coal-fired power to cleaner renewable energy.

The price tag for that transition would be astronomical though, costing as much as 400 billion rand ($28 billion), according to Masondo, the deputy finance minister. Under his proposal, 146 billion to 213 billion rand of sovereign debt would need to be forgiven or deferred, allowing the government to give Eskom an equity injection, help it secure green financing and close polluting power plants.

Private Creditors

“This is not a debt restructuring and private creditors or bondholders would not need to take a haircut,” Masondo told Bloomberg on Wednesday. “It should be a voluntary act by current or new holders of debt, or climate-focused financiers, to support the South Africa energy transition.” 

South Africa’s Treasury said Masondo’s comments are his personal views and not government policy. The South African Communist Party’s central committee said in an Aug. 29 statement that it welcomed the idea of swapping debt for green financing, which would enable Eskom to simultaneously shift toward renewable energy and tackle its debt burden.

Mark Swilling, deputy chairman of the state-owned Development Bank of Southern Africa and an advocate of the debt-for-climate swap, sees climate funds run by institutions such as the World Bank as potential backers. Major asset managers that are trying to burnish their green credentials could also contribute, he said.

“We are going to have to spend a load of money to buy ourselves out of trouble and there are people who recognize that,” said Swilling, who is also co-director of Stellenbosch University’s Centre for Complex Systems in Transition. “Everyone wants this to happen, they need a model.”

UNDP’s Steiner Expects to See Progress in Nature, Climate Swaps

Debt transactions related to environmental targets have been done before, albeit on smaller scales. In 1992, Poland agreed to environmental concessions in exchange for forgiveness of a $3 billion debt it owed to the Paris Club of creditors. In 2017, $30 million of debt that Seychelles owed to the Paris Club and South African creditors was scrapped after it agreed to undertake conservation measures. 

Transition Blueprint

Pakistan is also innovating in climate-related finance, and expects to issue a so-called nature-performance bond of up $1 billion this year, according to Malik Amin Aslam, a climate-change adviser to Prime Minister Imran Khan. Swilling said that while other countries including Indonesia -- a heavy coal user -- could be candidates for a debt write-off, South Africa has the advantage of being smaller and having a more sophisticated financial system. 

Any agreement should ideally be at government level to avert fears that Eskom might default, Swilling cautioned.

“You don’t want the creditors to smell blood,” he said.

A South African swap would be targeted primarily at governments focused on climate change, “but, with the right structure, could also attract investment from corporates working to meet net-zero or offset commitments,” Masondo said. New creditors could purchase small portions of foreign-owned debt and then forgive it in return for the South African government meeting emissions-reduction targets, he said.

“High levels of indebtedness can hold up what is urgently needed -- an acceleration of the energy transition,” Masondo said. A deal in South Africa would create “a blueprint for other transitioning middle-income, coal-dependent economies.”

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