- 82303_social-bond-theobald-covid19-economists-group_final-190520.pdf (0.46 MB)
A group of economists is proposing that the South African government consider the issuance of an innovative ‘social bond’ to raise up to R100-billion for the fight against the Covid-19 pandemic and to close what is likely to be a sizeable funding gap as the economy contracts and tax collections fall.
The proposal is made in a thought-leadership paper written by Stuart Theobald and Peter Attard Montalto, of Intellidex, with input from the Covid-19 Economy Group, a network of economists supporting efforts to address the economic impacts of the pandemic in South Africa.
It argues that South Africa is well positioned to access the emerging pool of environment, social and governance (ESG) investors, who are motivated by a desire to invest in ways that support positive socioeconomic and environmental outcomes.
“The South African government has long commanded global respect for its bond issuance and financial transparency. This positions it well to become a pioneer in a sovereign social bond issuance,” the paper asserts.
The authors estimate that South Africa, which has already announced a R500-billion support package and is forecasting a tax-revenue shortfall of R285-billion relative to the February Budget estimate, is likely to face a funding requirement of well over R800-billion.
Besides Budget reallocations, to be outlined by Finance Minister Tito Mboweni in a special adjustment Budget on June 24, much of that funding would have to be raised from traditional bond issuances. In addition, Mboweni has indicated that South Africa will seek to raise funding from multilateral lenders, such as the New Development Bank, the International Monetary Fund and the World Bank.
The paper argues, however, that ESG investors, accessed through a Covid-19 social bond issued both domestically and abroad, could provide a new funding source at a reasonable cost.
A growing investment trend, the paper notes, is for investors to allocate a specific portfolio tranche to ESG themes, such as environmental degradation, and corporate governance and social issues such as health and poverty.
“While financial returns will always be key, there is increasing recognition in mainstream investing circles that social outcomes and sustainability are important.
“There are varying views on how these should relate to the core investment principles of risk and return management, but it has created an investing marketplace that can be far more responsive to the funding needs created by the crisis than ever before,” the paper states.
Innovative health, economic and finance solutions are needed to respond to the crisis and the authors assert that the South African government should consider becoming one of a few sovereigns to issue a social bond to be used to fund the fight against the Covid-19 crisis.
The paper proposes an “ambitious” fundraising target of R100-billion, divided between onshore institutional investors (R40-billion); onshore retail investors (R10-billion) and offshore institutional investors (R50-billion).
Government may well choose to target a lesser amount upfront, however, leaving the flexibility to increase issuance if market demand allows.
“This could make a significant contribution to government’s funding gap, raised at lower cost while diversifying the government's investment base to include ESG funds,” the paper states.