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Ramaphosa government faces calls to tap foreign exchange gains to ease debt burden


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A prominent investor in emerging market debt has become the latest outfit to float the idea of South Africa’s government using its central bank’s foreign exchange reserve gains to tackle the country’s rising debt burden.

Amia Capital, a London-based hedge fund with about $1bn in assets under management, has joined NGOs in saying president Cyril Ramaphosa’s government should overhaul its debt management by using vast gains recorded on the government-owned gold and foreign currency account at the South African Reserve Bank.

This account has risen by almost 50 per cent in value in the year to March, meaning the $25bn facility is now worth just less than a tenth of South Africa’s gross domestic product.

In a draft research paper seen by the Financial Times, Amia economists Pedro Maia and Annik Ketterle, and Guido Maia, a London School of Economics PhD candidate, argued that parts of the “unusually large” sum could be transferred to the government to alleviate the debt strain on the nation’s economy.

The rise in so-called revaluation gains — which are largely the result of the rand’s fall — has, when coupled with the rise in the interest bill on the government’s debt, meant the cost of not using the funds has soared, the paper claims.

The research underlines how investors are rethinking South Africa’s public finances as it struggles to cope with a toxic combination of higher global interest rates and weak growth.

Using assets at the central bank to cover some of the government’s costs is a complex manoeuvre. Treasuries and investors are often wary of such a move, for fear of stoking inflation or leaving the bank short of reserves to fight currency speculators.

The SARB account has existed for decades, but it has only moved into the limelight this year. The fall in the rand against its holdings has increased its paper value to R459bn ($24.5bn) in March, compared with R314bn a year earlier.

Line chart of South African rand per US dollar showing The rand has fallen against a strong dollar

Amia said the South African Reserve Bank could transfer between a quarter and half of the profits from the gold and currency account to the government’s account at the central bank.

To avoid the government using these funds to pump up spending and risk stoking inflation, it would agree to use the funds exclusively to buy back government debt or retire upcoming maturities.

At current bond prices, “usage of close to 8 per cent of gross domestic product of cash could retire as much as 10 percentage points of GDP in debt, saving about 0.9 per cent of GDP for the Treasury per year on a sustainable basis, while still maintaining a well-capitalised central bank”, the authors wrote.

South Africa’s long-term borrowing costs have reached 13 per cent following this year’s global debt sell-off. South African civil society groups such as the Institute for Economic Justice, a local think-tank, have also called for the reserve account to be tapped in order to ease the debt burden.

“The magnitude of this account is unusual by international comparison,” said Pedro Maia and his fellow authors in the draft paper. Amia is known to be bullish on South African government debt, though it has not publicly disclosed its holdings and declined to comment to the Financial Times.

Many central banks pass on a proportion of their profits to their finance ministries. However, rate-setters can choose how much to give and also prefer to keep a portion of foreign reserves on their balance sheets as a buffer against exchange rate volatility.

Amia said South Africa could establish a rule to transfer part of the fund’s profit each year, while retaining a buffer and protecting against future losses.

Cyril Ramaphosa
President Cyril Ramaphosa told members of parliament that there is ‘currently no intention to review the mandate of the South African Reserve Bank’ © Jeenah Moon/Bloomberg

Ramaphosa’s African National Congress faces having to raise taxes or cut spending even as it fights to win re-election next year.

Enoch Godongwana, South Africa’s finance minister, warned this month that “our economy has not grown fast enough to support increasing expenditure or our current debt levels”, which are approaching three quarters of GDP.

But Rashad Cassim, deputy governor at the central bank, told the Financial Times: “Distributing these profits, without selling foreign exchange reserves, would entail monetisation of the balances, which implies substantial liquidity management costs for the SARB and higher inflation risk.”

“It is important to emphasise that [these] balances are not a windfall that can be enjoyed with no further costs,” he said. Talks on using the account “would require subsequent work to determine how best to manage the liquidity spillovers and potential longer-term macroeconomic implications”.

While the profit transfer would inject liquidity into the system, analysts said the cost of hoovering it up could be managed through the Treasury taking on a loan at the SARB’s base rate. At 8.5 per cent, this would be lower than what the government pays to borrow on the market.

The debate is tricky for the central bank because in the past it has faced attacks from elements in the ANC who have sought to change its independent anti-inflation mandate.

Ramaphosa told members of parliament last week that there was “currently no intention to review the mandate of the South African Reserve Bank”. But the bank has often been a political target of ANC infighting, and next year the stakes will rise as the party battles to retain its long-held electoral majority.

“SARB will [want to] make sure [any transfer to the government] is neutral from a monetary perspective, and not supporting [fiscal] spending, and [that it does not reopen] independence question booby traps,” said Peter Attard Montalto, managing director at Krutham, a South African research group.

The Treasury declined to comment.

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