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Smoke and Mirrors in South Africa

29 February 2024   |  

The South African government announced an unconventional strategy last week that involved tapping into its gold and foreign exchange reserves in an effort to temper its growing debt burden. While investors initially cheered this financial maneuver, we are more skeptical. Unfortunately the government announced this strategy without clearly outlining the governance of the framework. We break down the transaction and potential drawbacks below:

Transaction Overview: 

  • At its core, this transaction is essentially the South African Treasury borrowing against an asset using the South African Reserve Bank (SARB) as an intermediary. In this case, the collateral is an obscure asset, the Gold and Foreign Exchange Contingency Reserve Account (GFECRA). The maneuver is similar to a homeowner borrowing via a HELOC. 
  • This transaction does not reduce government borrowing but is rather a new way for the government to borrow and, at the moment, is a cheaper alternative to issuing government bonds. 


  • The proper way to monetize the revaluation gains in the GFECRA is to sell reserves, which has been ruled out given the country’s reserve inadequacy.  Absent selling foreign exchange, the Treasury is effectively borrowing from the SARB while posting GFECRA balances as collateral. Like the homeowner with a HELOC who both wants cash and to continue living in the home, this exposes the country to the risk that the value of the collateral becomes insufficient to support the borrowing. 
  • In order to mitigate inflation risks of this operation the SARB plans to sterilize the initial liquidity injection. The sterilization cost at the SARB will be an ongoing cost to the Treasury. And it’s not trivial.  The cost this fiscal year is roughly 10bps of GDP and 45bps of fiscal revenue. This cost will increase over time.  
  • The expected interest cost savings is minimal but raises fiscal risks by shortening the maturity profile of government borrowing by swapping fixed rate debt for floating rate debt at the Repo rate. 
  • This operation impairs the SARB’s ability to conduct monetary policy by: 
    • Increasing the cost and complexity of selling reserves, since part of the reserves have been effectively been sold off already.
    • Increasing the cost of tightening monetary policy, since effectively the Treasury has more floating rate debt via the SARB sterilization.  
    • Increasing the risk of a stronger ZAR, by reducing the GFECRA account and calling into question the solvency of the SARB.
  • The operation also reduces fiscal transparency as fiscal activity is now taking place on the SARB’s balance sheet.
  • Since the governance framework has not been established this raises concerns and consequently puts the SARB’s independence at risk.   

The bottom line is that using GFECRA reserves does little to solve South Africa’s challenging problems but introduces new risks to the country.  For investors, this adds another concern to an already long list.  Instead, the government should focus on genuine reforms that improve the economic growth trajectory and take genuine steps to correct the fiscal issues.   

  • EMsights Capital Group
  • Insights

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