BUDGET 2024 | Rand leaps after news of Godongwana’s budget speech

Markets liked the fact that government will use the Gold and Foreign Exchange Contingency Reserve Account to reduce borrowing

21 February 2024 - 18:26
Finance minister Enoch Godongwana delivered his Budget Review on Wednesday.
Image: RUVAN BOSHOFF Finance minister Enoch Godongwana delivered his Budget Review on Wednesday.

The rand jumped on the news that the government was planning, for the first time, to tap into a special R500bn account to reduce debt and debt-servicing costs in the next three years.

Having opened at R18.91 on Wednesday, the local currency at some point hit R18.76 as markets reacted positively to news that the government would use the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to reduce its reliance on borrowing.

At a media conference on Wednesday, Treasury director-general Duncan Pieterse said drawing from the account would save R40bn in debt servicing costs in the next three years.

Debt is projected to reach R5.2-trillion, or 73.9% of GDP, before stabilising at 75.3% in 2025/26. While the budget deficit — the amount the government has to borrow to cover the gap between revenue and spending — declined to R331bn in 2023/24, the cost of serving overall debt is still high. Debt servicing costs will rise from R356.1bn in 2023/24 to R440bn in 2026/27. Right now, the government spends more on servicing debt than it does on health and policing.

The Treasury has revised its growth estimates slightly upwards to 1.3% this year, 1.6% in 2025/26 and 1.8% in 2026/27. It is upbeat over the pace of structural reforms and sees improvements in the performance of Transnet and interventions to reduce load-shedding.

Tabling the budget on Wednesday, minister of finance Enoch Godongwana said the government would draw down on the contingency reserve account, managed by the Reserve Bank, which has accumulated reserves of more than R500bn as result of rand depreciation over the past 12 months. An amount of R250bn will be drawn from the account, however, the Treasury will access only R150bn, with the remaining R100bn going back to the bank to ensure it has sufficient buffers to absorb swings in the exchange rate.

“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 bank is not compromised.”

The Budget Review said the draw down would be formalised through legislation that would be tabled with the budget on Wednesday. The government will use these funds to reduce borrowing and consequently the growth in debt servicing costs, the Budget Review said.

The GFECRA account held by the Reserve Bank captures profits and losses on foreign currency reserve transactions.

Addressing reporters ahead of the budget speech, bank governor Lesetja Kganyago said the full amount that will be drawn from the GFECRA would be R250bn, of which R100bn would cover the administrative cost of covering the drawdown.

“We are transferring R250bn to the Treasury, but the Treasury will spend R150bn,” Kganyago said.

The Budget Review said the GFECRA funds came in handy as over the past year, the government made adjustments due to lower-than-expected revenue, new spending pressures, and had R206bn removed from department baselines as well as provisional allocations.

“Subsequent improvements in revenue and reduced debt-service costs associated with the expected GFECRA distribution have made it possible to reverse some of these reductions,” the Budget Review said.

It said the last settlement of balances in the account was reached in 2003, to the value of R28bn in the bank’s favour, and that the value of the account had grown to more than R500bn due to significant rand depreciation.

“A proposed settlement agreement to be formalised between the Treasury, and the bank will settle a portion of the valuation gains after ensuring that the necessary buffer and contingency reserve are fully funded,” the review said.

It said the government decided to further mitigate fiscal risks by reducing borrowing over the medium term, using a portion of valuation gains in the GFECRA.

“As a result, debt-service costs will decline by R30.2bn over the 2024 MTEF period compared with the 2023 MTBPS estimate,” the review said.

As a result of the use of GFECRA, the government will receive distributions of R100bn in 2024/25, R25bn in 2025/26 and R25bn in 2026/27 from the bank to reduce domestic market financing requirements and the growth of debt stock and debt servicing costs.