South Africa’s R200 billion coronavirus loan scheme isn’t working as it was intended, says financial market research group Intellidex – and if things don’t improve soon, it will create an even bleaker outlook for the economy in 2020.
South Africa declared a state of disaster on 15 March and subsequently entered a strict lockdown on 26 March 2020 that dramatically disrupted economic activity.
While some economic measures were taken at the time to relieve the economic impact, including tax holidays and some grant schemes, a more comprehensive economic response package with R500 billion of interventions was announced by president Cyril Ramaphosa on 21 April.
Included in this figure was a R200 billion loan guarantee scheme to enable banks to lend to businesses suffering from Covid-19 related distress.
Finalisation of the details of the scheme and contractual arrangements between National Treasury, the Reserve Bank and the seven banks that would be using it, were concluded only by 11 May.
Banks began to offer such loans to their clients soon after: loans were made available to companies with a turnover of under R300 million and could be used to cover overheads only – such as rent, payroll, debt service costs and other fixed costs.
However, according Intellidex, only a fraction of the fund – around 1% or R2 billion – has been used to date; and if things don’t improve quickly, the country’s already stunted economic growth could suffer.
What’s gone wrong?
“A picture is emerging of the obstacles to greater take-up on both the supply (banks) and demand (companies) side from an accumulation of anecdotal feedback,” Intellidex said.
On the demand side, the group noted that companies are hesitant to take up the loans due to the tight restrictions on what can be done with the funds; the repayment terms; the limits on eligibility; and the simple fact that the loans are being offered almost two months too late.
In brief, the loan packages were offered long after many vulnerable businesses had already taken measures to meet the crisis – either by retrenching staff, cancelling rental agreements or renegotiating contracts.
When support for companies was delivered, they came with strict conditions attached, dictating where the money could be used, with a short payment holiday of six months, and business owners had to take on this new financial risk with personal surety on the line.
There were also some sticking points in who was eligible for the loans, Intellidex said, noting that businesses that are subsidiaries or parts of groups were being turned away.
On the supply side, Intellidex found that banks were not exactly incentivised to offer the loans – with the policies around the loans designed to be break-even, thus giving no profit motivation. The banking system itself is not geared for the flexibility the fund requires, it said.
The group said that the structure of the guarantee fails at increasing credit appetite for banks, as government gives an effective 94% guarantee, but requires banks to use their established credit risk assessment processes.
If government audits a defaulted loan and finds this process was not followed, it could refuse to pay the guarantee. This has a the net result of invalidating any drive to increase credit appetite.
“Put very simply – the point here is that there is greater credit risk in the system which needs to be lent into – if that isn’t happening, then incentives are not right,” Intellidex said.
Intellidex chairman, Dr Stuart Theobald, said that the consequences of this failure to get these funds into the hands of businesses could be dire for the economy.
The group’s baseline GDP outlook for South Africa in 2020 shows a contraction of 10.4%. However, this is under the assumption that the full R500 billion stimulus package is delivered and used.
“Without (the R500 billion), the decline would be 16.4%,” Theobald said, noting that the R200 billion loan scheme, while 40% of the package, represents 5.1 percentage points of the 6 percentage point value of the stimulus.
If the loan scheme fails, economy growth would still be -15.5%.
“This is clearly a far worse economic outcome and is precisely what the R500 billion package was intended to avoid,” he said.
To fix this, Intellidex says that the loan scheme needs to be opened up and made to be less restrictive, and more flexible in how its is delivered.
It said that the restrictions on what can be done with the funds needs to be loosened – allowing companies to pay dividends, or invest in their future operations.
“If a restaurant or hair salon wants to use the lockdown period to remodel, let them – it will create employment. If a retailer wants to use the money to build a website to enable e-commerce, this should be encouraged, not restricted,” it said.
Other changes include making the full loan available, instead of paying it out over three months; extending the lending term and lowering the cost – or even fixing the rate; adjusting the size restriction for companies; and giving certainty lenders by proving a vetting process to follow, and giving an explicit budget for the scheme.
“The bank guarantee scheme can and must form a critical component of the government’s response to the crisis. It has the potential to provide five percentage points of GDP growth to the economy at this crucial time,” Theobald said.
“It can rescue companies and jobs while driving economic behaviour. We urge all relevant parties to work together in a collaborative and innovative spirit in the public interest.”