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South Sudan Considers Borrowing as It Prepares for ‘Worst’

Aug. 7 (Bloomberg) -- South Sudan will raise funds from local banks, boost tax collection and consider borrowing outside the country to offset the impact of a looming shutdown of its oil exports, Finance Minister-designate Aggrey Tisa Sabuni said.

While the government is seeking to negotiate a solution to Sudan’s threat to halt the country’s crude shipments, its strategy toward the neighboring state is to “hope for the best and prepare for the worst,” Sabuni, 62, said in an interview on Aug. 2 in the capital, Juba.

South Sudan has borrowed “heavily” from domestic private companies since the country became an independent state in July 2011 and “I don’t think we’ve completely exhausted that,” he said. “That would be a source to tap into, but we’re also not ruling out foreign borrowing.”

Landlocked South Sudan exports all of its crude via a pipeline through Sudan to Port Sudan on the Red Sea. Sudanese President Umar al-Bashir has threatened to halt shipments on Aug. 22 unless the south withdraws support for rebels opposed to his rule. South Sudan denies its backing the fighters and accuses Sudan of deploying troops in its oil-producing Upper Nile region. An African Union team is investigating the claims.

A dispute last year between the two countries over exports cut the size of South Sudan’s economy by half to $9.34 billion, according to World Bank data. The country has sub-Saharan Africa’s third-biggest oil reserves, after Nigeria and Angola, according to the BP Statistical Review of World Energy.

‘Dire Situation’

“We’re talking of a very dire situation” if the current impasse isn’t resolved and oil shipments are stopped, said Sabuni, who previously served as an undersecretary in the Finance Ministry and as an economic adviser to President Salva Kiir. “If we have a choice, we would want to go for foreign-government-guaranteed credit. When the situation becomes very dire, we will not hesitate to go to open-market borrowing.”

South Sudan became a member of the International Monetary Fund last year and is eligible for concessional lending. It doesn’t have a credit rating. Banks operating in the country include Kenya Commercial Bank Ltd., Kenya’s biggest lender, CfC Stanbic Holdings Ltd., a unit of Standard Bank Group Ltd., and Equity Bank Ltd. of Kenya.

“South Sudan could probably collateralize future oil shipments to secure a bridge loan, but the terms would not be very favorable,” Philippe de Pontet, Africa director at Eurasia Group, said in an e-mailed response to questions. “The creditor, most likely an energy dependent Asian country like South Korea, would probably demand a premium to offset the risks. Foreign aid will not ride to the rescue and Western donors are losing patience with Juba.”

Oil Production

South Sudan seceded from Sudan in July 2011 and took three-quarters of the formerly united country’s oil output of 490,000 barrels a day. Its low-sulfur crude, which is prized by Japanese buyers for use as clean-burning power-generation fuel, is pumped mainly by China National Petroleum Corp., Malaysia’s Petroliam Nasional Bhd. and India’s Oil & Natural Gas Corp. Production is currently 100,000 to 180,000 barrels per day, according to the Petroleum Ministry.

Sabuni was appointed after Kiir fired his entire cabinet and vice president last month, reducing the number of ministries to 19 from 29. The leaner administration “translates into a huge saving,” though it’s insufficient to deliver economic prosperity, Sabuni said.

Revenue Collection

South Sudan will weather the impact of a shutdown “by diversifying the economy as a whole and by particularly deepening the collection of non-oil revenue,” he said. The country is targeting tax revenue of 1.5 billion South Sudanese pounds ($469 million) in the year through June 2014, more than double the 700 million pounds received last year, former acting Finance Minister Marial Awuou Yol said last month.

About 80 percent of South Sudan’s 10.3 million people rely on agriculture, mostly subsistence farming, for a living. The government will invest in farming, fisheries and animal resources, improve seed distribution for farmers and build access roads to transport produce to town centers for export, Sabuni said. The country also plans to expand its tourism industry to generate foreign currency, he said.

The African Union said on July 23 it expects to complete its probe of Sudan and South Sudan’s claims of support for rebel groups within six weeks. The continental body has “strongly” urged Sudan to refrain from shutting down the pipeline.

To contact the reporter on this story: Mading Ngor in Juba at mngor@bloomberg.net

To contact the editor responsible for this story: Nasreen Seria at nseria@bloomberg.net

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