Interest rates

Treasury reveals interest rates on ‘cheap’ French and German climate loans

France and Germany both announced new concessional climate loans to South Africa at COP27.

Photo by Mohamed Abdel Hamid/Anadolu Agency via Ge

  • The Treasury has started to increase its stock of debt with international financial institutions.
  • Interest rates are well below the national standard rate.
  • France and Germany have granted loans for the just energy transition.
  • For more financial news, visit The front page of News24 Business.

Recent loans obtained from French and German development banks to finance South Africa’s just energy transition come with interest rates well below those the national treasury can obtain on the market.

In a statement on Thursday, the Treasury said the two loans of 300 million euros (5.3 billion rand) – from the French Development Agency (AFD) and the Kreditanstalt für Wiederaufbau (KfW) – would be with rates of approximately 3.6% and 3% respectively. The rates are linked to the floating interest rate Euribor plus 129 and 69 basis points, respectively.

This compares favorably to the average rate at which the government currently borrows, which is about 8.9%. Both loans have a term of 20 years with a grace period of five years.

“The estimated cost to the government to raise an equivalent loan today in the market would be approximately 8.9%. This estimate is based on an estimate of the fair value of South Africa’s foreign currency bonds by relative to the risk-free rate, secondary market activity and historical issuance spreads,” the Treasury said.

Due to high borrowing costs, the Treasury began to increase the share of its debt stock held by international financial institutions. Earlier this year, he borrowed 11 billion rand from the World Bank at a concessional rate in his first loan transaction with the bank. Last week, the World Bank approved a 9 billion rand concessional loan to Eskom to finance just transition projects.

LILY | COP27: SA finally secures R10.7bn loan deals from France and Germany on initial pledge of $8.5bn

While the ANC has previously criticized the World Bank and many of its members remain wary of any “conditionalities” that might be imposed, there has been a marked shift in attitude.

“Due to South Africa’s high debt stock and the current high interest rate environment, replacing market loans with much cheaper concessional loans allows South Africa to South to reduce its cost of financing and its overall debt burden. By reducing debt service costs, the government is creating more fiscal space for critical social and other priorities,” the statement said.

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