South Africa buys some time

 ·23 Feb 2024

South Africa drawing down the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) is a temporary fix until the country generates faster economic growth.

At the 2024 Budget earlier this week, Finance Minister Enoch Godongwana said that National Treasury will receive R100 billion from the GFECRA in 2024/25, with further drawdowns of R25 billion in the next two fiscal years.

Another R100 billion will flow to the South African Reserve Bank (SARB). This means that there will be a total drawdown of R250 billion, which should leave enough of a buffer as the total pool stands at over R500 billion as of last January 2024.

The Bureau for Economic Research (BER) said that the funds could make a meaningful contribution in alleviating some pressure on the South African fiscus if they are managed prudently and spent wisely.

“Indeed, the better debt-to-GDP and deficit projections over the medium term are largely due to utilising the GFECRA funds,” said the BER.

Investec Chief Economist Annabel Bishop previously said that using a portion of valuation gains in the GFECRA could cut projected debt-service costs by R30.2 billion over the 2024 Medium Term Expenditure Framework period.

“It is, however, not a long-term solution to the structural ailments facing the South African economy – it merely buys South Africa some time to generate faster economic growth,” warned the BER.

“The February budget means that the National Treasury now sees debt-to-GDP peak at 75.3% of GDP in 2025/26, from 77.7% before (November). This still only moves down very slowly, with the shape of the trajectory largely unchanged.”

With some details on the amount and timing of the GFECRA drawdown not yet supplied, the BER remains more downbeat in its debt-to-GDP ratio than the National Treasury.

However, it has conceded that it will likely be lower than the 83% peak pencilled in for 2027/28.

“This is mainly because we bring in debt support to Eskom ‘above the line’ as it is technically a transfer of funds and thus results in an increase in debt,” it said.

“National Treasury still does not put it in their calculations as such, which also means that their primary budget surplus of 0.3% of GDP in the last fiscal year is a bit misleading.”

“This is important to note because, in the absence of a formal new fiscal anchor (which needs to be legislated), National Treasury is using achieving primary budget surpluses as their goal – but this only happens much later than their current estimates when you take full account of the Eskom transfers.”

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