Jury’s out on green recovery

The coronavirus pandemic has exacerbated South Africa’s economic woes, with the gross domestic product (GDP) predicted to contract by 7.2% in 2020 and a sharp increase in job losses. With this on the cards, how is the government hoping to change its fortunes? The answer coming from the top is investing in infrastructure. 

Last month President Cyril Ramaphosa held the sustainable Infrastructure Development Symposium of South Africa where he spoke about the prioritising of infrastructure development to support structural transformation, growth and job creation. 

But based on the Treasury’s supplemental budget in June, the country’s financial constraints would make it difficult for South Africa to embark upon big, new projects. 

To solve that problem, Ramaphosa looked to investments to support the country’s infrastructure projects. He said that financial institutions such as the New Development Bank, the Development Bank of Southern Africa and the African Development Bank have agreed to assist. 

Martyn Davies, the managing director of emerging markets and Africa at Deloitte, says many countries are going to try to get out of their crisis by placing the state at the centre of pushing economic growth. 


The growth models that encouraged globalisation, free markets and breaking down of barriers to trade have now come to an end, according to Davies. 

He predicts that there will be increased protectionism. “It’s only naturally that flowing from this will be talk of infrastructure driving growth and this is going to result in significant spending by the state.”

Nomhle Ngwenya, a PhD student at the University of the Witwatersrand, is researching how green bonds can be used for Covid-19 economic countermeasures and to grow the economy. 

“We need multidisciplinary and innovative approaches to increase funding for such unprecedented times,” she says. 

Green bonds were created to fund projects that have positive environmental or climate benefits, according to the Climate Bond Initiative, an international, investor-focused nonprofit.

Ngwenya says South Africa had to borrow money from financial institutions, such as the International Monetary Fund, and this money needs to be repaid. Ngwenya backs green bonds as a good option for the country because they tend to get oversubscribed — more people want them than there is supply — and they bring advantages such as tax exemptions. 

Ngwenya says that the issuing of green bonds from investors or the government can become an important financial mechanism to support a green economic recovery. And the advantage of that, she argues, is it is aligned with the goals to curb the climate crisis and can further boost the growth of the struggling economy through investments in the renewable energy market.

Green bonds can also be invested to Covid-19 countermeasures if the proceeds go to hospitals that have climate-smart infrastructure such as using solar panels for electricity generation or hospitals that are being innovative in reducing the negative environmental effects of medical waste. But this is only possible if both the government and the private sector start having serious discussions about a green Covid-19 economic recovery.

“Investors may be hesitant to purchase such bonds” from South Africa because it has lost all of its positive credit ratings

If this plan materialises, South Africa will join other countries doing this. Forbes reported this week that the European Commission is placing the European Green Deal at the centre of its economic recovery plans, and the commission’s energy chief is focusing on the European Union building renovation wave. 

Bruce Stewart, head of capital markets originator at Nedbank, says there is an opportunity for South Africa to raise much needed money through bonds that are either green or social bonds. But he cautions that this requires the issuer to “embrace the established globally accepted taxonomies that enable such finance to be directed to specific use of proceeds with the attendant levels of monitoring, tracking and reporting to ensure the integrity of such investments or investors”. 

Lukman Otunuga, a senior research analyst at FXTM, an online trading and investing platform, says South Africa’s bond markets were on a rollercoaster ride because of Covid-19, but they are now doing better in the second quarter of 2020. This can be attributed to lower interest rates and cooling inflation, with Mboweni’s pledge to eliminate the deficit offering an additional boost. 

Otunuga says green bonds have a big potential for growth, especially when considering how containing global warming is a major theme for investors. 

But he cautioned that “investors may be hesitant to purchase such bonds” from South Africa because the country has lost all of its positive credit ratings. This could mean that no matter how attractive the bonds are, the underlying problems with the economy will keep investors away. 

Davies says South Africa is a perennial under-spender when it comes to infrastructure. He says the country’s spending on infrastructure peaked in 2008 at about 24% of GDP during the build-up to the Fifa World Cup in 2010. But since then it has been under 20% and that is not significant enough to bring real growth. 

He suggests that proceeds from the green bonds can be used for Eskom, which has the imperative to decarbonationise. 

He also emphasised that the government needs to follow a “liberalisation” agenda by allowing renewable energy companies to enter the energy sector. 

He says the country is not going to raise a lot of money in green bonds if the state is preventing competition. He asked: Why would private capital invest in a sector that is not allowed to compete in?

Davies says the government does not have to privatise the state-owned companies but it should allow other companies to operate in the same market.

Tshegofatso Mathe is an Adamela Trust business reporter at the M&G

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Tshegofatso Mathe
Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian.

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