South Africa Weighs Tapping Foreign Reserve Gains to Close Funding Gap

Ntando Thukwana and S'thembile Cele
·2 min read

(Bloomberg) -- South Africa is considering digging into the nation’s 459 billion rand ($24.6 billion) of foreign reserves to close a funding gap as tax revenue falls short of target, the nation’s finance minister said.

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The central bank oversees the Gold & Foreign Exchange Contingency Reserve Account, which contains unrealized profits or losses on the reserves that are incurred due to exchange rate fluctuations. While the gains — and losses — accrue to the government, the Treasury has refrained from tapping them so far.

“Here is the problem, that thing is not hard cash” and the value fluctuates on a daily basis, Finance Minister Enoch Godongwana said in an interview in Cape Town on Wednesday following the tabling of his medium-term budget policy statement. “We are looking into it” but no timeline has been set for determining whether the account will be accessed.

Read More: South Africa Confronting Debt Blowout as Revenue Misses Forecast

There are also technicalities associated with accessing the account “because for the Reserve Bank to take the money out of the system, they are going to do it at a cost to themselves,” the minister added. “Let me just say that we are not ruling that out.”

Tax revenue is expected to fall 56.8 billion rand short of what was anticipated in February, the budget update showed, and the National Treasury said it will ramp up borrowing, trim spending and raise taxes to compensate for the shortfall. Should those plans fail to yield results, tapping the reserves account could prove one of the only viable alternatives.

Other highlights from the interview:

  • There are strict rules in places governing what proportion of debt the Treasury borrows on international markets.

  • “The rationale for that is that you don’t want to be exposed to currency fluctuations which may impact on your debt profile.”

  • The government prefers most of its debt to be rand-denominated, even if loans are taken out on international markets.

  • “We’re not ruling that out the international market. We have gone to the World Bank now and that grouping has given us quite interesting terms of 500 basis points below market.”

  • The Treasury is tightening its fiscal stance and it would be “a bad combination” if the central bank were to simultaneously further tighten its monetary stance.

  • “I hope they are not going to tighten.”

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