The rand and international dollar bonds jumped on Wednesday, after the finance minister said the government would tap R150 billion ($7.99 billion) from a central bank-administered contingency account in order to limit borrowing.
At 1249 GMT, the rand traded at R18.82 against the dollar, around 0.49% stronger than its previous close. Just before Finance Minister Enoch Godongwana’s 2024 budget speech, it had been trading close to its previous close.
South Africa’s longer-dated international bonds rose the most in response to the 2024 budget speech, with the 2052 maturity jumping 1.58 cents on the dollar at 1249 GMT to trade at 87.8 cents, according to Tradeweb data.
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Africa’s most industrialised economy has barely grown in a decade while revenue collection has also been weak, leading to rising debt levels.
The Treasury said in the 2024 budget that it was able to tap the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) – which had a balance of R507.3 billion in January 2024 – because it was “now larger than any plausible losses on foreign exchange reserves from rand appreciation”.
It said the settlement would be used to cut borrowing and the rise in debt servicing costs, meaning gross debt is projected to stabilise at 75.3% of GDP in 2025/26, lower than 77.7% of GDP seen in November.
“The government opted for the easy way and tapped R150bn of the valuation gains in the GFECRA,” Jee-A van der Linde, senior economist at Oxford Economics, said in a note to clients.
“The GFECRA profits, which will be distributed over the next three years, helps to offset the government’s net borrowing requirement, and reduces debt-service costs. That said, government has not actually reduced spending nor is it borrowing less.”
South Africa’s bleak economic backdrop, with GDP growth averaging 0.8% since 2012, is looming over national elections due on May 29 that could see the governing African National Congress (ANC) party lose its parliamentary majority for the first time since the end of apartheid 30 years ago.
Meanwhile, data from Stats SA showed earlier on Wednesday that annual inflation quickened to 5.3% in January from 5.1% in December. Economists polled by Reuters had predicted an increase in to 5.4%.
The South African Reserve Bank likes to see inflation around the mid-point of its 3% to 6% target range and has said it wants to see a clearer disinflation trend before cutting interest rates.
“Interest rates will be kept steady in the first half of the year, with the first cut of 25 basis points (bps) expected in July, followed by cuts of similar magnitude in September and November,” Nedbank economists said in a research note.
