The rand rose by 0.5% to a two-week high of R18.80 to the US dollar yesterday after Finance Minister Enoch Godongwana delivered a fiscally responsible election budget, which will see the government lessening its borrowing requirements this year through a R150 billion draw-down from the contingency reserves, for the first time in 20 years.
Tapping into the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) had been a dominant theme ahead of the Budget speech, and yesterday it came to pass that the National Treasury and the South African Reserve Bank (SARB) were on the same page on the issue.
According to Treasury, the last settlement of this kind was done in 2003.
Tabling the 2024 Budget yesterday, Godongwana announced that the National Treasury would dip into the GFECRA, which had a balance of R507.3bn last month, in a bid to reduce the country’s ballooning debt service costs through a reduction in government borrowing.
Godongwana said they could do so because the GFECRA was “now larger than any plausible losses on foreign exchange reserves from rand appreciation”.
This is essentially the unrealised profits on South Africa’s gold and foreign exchange reserves, typically from rand depreciation over time.
The government plans to use R100bn from the GFECRA in the 2024/25 fiscal year, and R25bn in each of 2025/26 and 2026/27, lowering the government’s debt trajectory and borrowing requirements.
“We have taken the decision to introduce a reform of the Gold and Foreign Exchange Contingency Reserve Account, also known as GFECRA. Ultimately, we are bringing South Africa closer to our peers and ensuring alignment to international best practice,” Godongwana said.
“We will draw down R150bn of the GFECRA balance once we have ensured that sufficient buffers are available to absorb exchange rate swings and the solvency of the Reserve Bank is not compromised.”
The unpopular decision to go for the drawdown is expected to result in a decline of some R30.2bn in government debt servicing costs over the 2024 Medium-Term Expenditure Framework (MTEF).
SARB Governor Lesetja Kganyago assured the public that the actual reserves would not be liquidated to raise funds for Treasury, but instead, the central bank would generate a new liability, which it would then need to service.
Tapping into the GFECRA also allowed Treasury to avoid implementing drastic fiscal consolidation or implementing any major tax increases as it was feared, but still managing to raise an additional R15bn for the fiscus primarily by increasing some excise tax rates.
It also enables President Cyril Ramaphosa to demonstrate fiscal prudence while avoiding cuts in popular spending programmes during an election year.
EY Africa chief economist Angelika Goliger said the value of the reserves in rand terms increased from R1.8bn in 2006 to R507.3bn at the start of this year, due to the weakening of South Africa’s exchange rate.
Goliger said the use of this allocation in the context of reducing national debt was reasonable under the critical condition of having a strong legal framework in place to maintain the stability of the account going forward.
“As this is only a temporary measure, use of the GFECRA needs to be coupled with managing key expenditure risks going forward and strong economic growth to drive revenue.
“Reducing South Africa’s debt, and structurally shifting spending from consumption towards investment, will improve the ability of fiscus to support economic growth.”
Meanwhile, the government projects it will collect R700 million more in the current fiscal year than was expected in the medium-term budget in November.
A minimum 15% tax rate will be imposed on all multinationals in line with an agreement signed by more than 135 countries.
Treasury will propose a binding fiscal anchor to ensure a long-term sustainable path for public finances but a debt-stabilising primary budget surplus will anchor fiscal policy for now.
Godongwana allocated no money to bail out struggling state-owned logistics company Transnet, and public sector wage increases that were agreed with labour unions in March last year were provided for in the Budget framework.
Godongwana allocated R33.6bn to extend the Social Relief of Distress grant until March next year, with provisional allocations of R35.1bn and R36.7bn for the 2026 and 2027 financial years, respectively, pending a decision on how it would be funded.
Standard Bank South Africa’s head of macroeconomics Elna Moolman said the budget favoured fiscal continuity and consolidation over any pre-election populist decisions, and in contrast with the consensus forecasts for sustained and significant fiscal deterioration.
“The Budget confirms the government’s commitment to fiscal consolidation. Therefore, financial markets are likely to react positively to the Budget,” Moolman said.
“While there might be a strong initial response to better-than-expected fiscal and funding metrics, this may partly unwind as investor concern about upside spending risks and downside revenue risks persists.”
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