South Africa’s fiscal position, with its gross-debt-to-GDP expected to exceed 100% between 2021 and 2022, severely limits the government’s room to drive economic recovery, therefore the current emphasis on an investment-led recovery.
To stimulate economic activity, there is a need to specifically focus on sectors that enable the country to address the challenges of joblessness and inequality. Investments that yield positive financial returns without any benefit to society could widen the inequalities that are already unsustainable. For the private sector to lead inclusive growth, one of the critical enablers will be access to finance – more so considering the eroded reserves of corporates currently. Without access to finance, the private sector’s plans to reactivate the economy would be hamstrung.
Financing options for the private sector are traditionally dominated by equity and senior debt. Both options tend to be unsuitable during times of economic crisis, such as the current one. This mismatch between the capital available (through traditional sources such as commercial banks), and the capital required by corporates, should steer us towards designing new financial instruments and scaling up those that already exist at a relatively smaller scale that are aligned to a new economic construct. Two examples of such products that are opportune include raising capital through a special purpose acquisition company (SPAC) and mezzanine debt.
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13 August 2020