The World Bank's Board of Executive Directors has approved a US$3.75-billion loan to South African power utility Eskom after three members, the United States, Netherlands and Britain abstained from the discussion, mainly on environmental concerns. The bulk of the loan will go towards financing of a coal-fired power station in the Limpopo province, with the rest designated towards renewable energy development.
Significance: The loan, which was widely debated, is seen as a critical part of Eskom's funding model to help finance its capacity generating programme. Securing energy supply is not only critical to South Africa's economic wellbeing but also that of the neighbouring countries. The granting of lower-than-requested tariff increases earlier in the year raised some questions on energy sustainability in the country, but with recent developments these fears are addressed to a certain extent and will help boost investor confidence in the country. Eskom's commitment to the development and promotion of renewable sources will however play a crucial role in future investment and capital inflows. The loan, which has a maturity of 28.5 years and a grace period of seven years, according to Reuters, was granted at a rate of six-month LIBOR +0.5% fixed margin and a variable spread of 0.24%, to be reset biannually. In this regard the inflow of funds will be rand-supportive over the short term, while repayments will hinge critically on the strengthening of Eskom's balance sheet, rand stability and sustainable economic growth in the country. Due to the low level of foreign debt in South Africa (around 25% as a percentage of GDP in U.S.-dollar terms), we do not expect the granting of this loan to substantially increase the country's foreign exposure.
