The 2024/25 national budget will mainly be remembered for its novel utilisation of a portion of South Africa’s gold and foreign exchange contingency reserve account (GFECRA), commonly known simply as the forex reserves.
Most countries have foreign exchange reserves, held by their central banks, which can be used for purposes of maintaining macro-economic stability. Specific examples include interest payments and principal repayments on external government debt denominated in foreign currencies and beefing up the public finances during times when fiscal revenue has not met budget expectations.
The latter is exactly what has been implemented by National Treasury in the wake of the tax revenue shortfall experienced during the 2023/24 fiscal year. The latter may be attributed to weak prices for several of South Africa’s key commodity exports, sluggish world growth and weak domestic demand as a result of the record high interest rates that have been plaguing consumers and businesses alike.
Huge forex reserve kitty
For anyone that is concerned over this practice, it is interesting to note that the origin of the hefty R885 billion in foreign exchange reserves currently held by the SA Reserve Bank (SARB) was a fiscal transfer to the SARB of (merely) R28 billion made by then finance minister Trevor Manual in 2003.
The need for assisting the SARB with some measure of forex reserves arose because of the emerging market currency crisis of 1998, when the country’s central bank blew all of the reserves in a vain attempt to protect the rand from the fallout of the implosion of Asian currencies.
At the time, the Thai Baht, the Indonesian rupiah and the South Korean won all lost more than half of their values over a period of six months. Other emerging market currencies, including the rand, also suffered in the crossfire of (temporary) emerging market aversion by global fund managers.
The fact that South Africa’s forex reserves swelled from less than R100 billion a decade ago to close to R900 billion has proven to be an enormous windfall in the current macroeconomic climate of subdued growth and below-par tax revenue collections. Finance minister Godongwana plans to draw down R150 billion of these reserves over three fiscal years.
Budget passes the acid test
Capital market reaction to a country’s budget is widely regarded as the most informative barometer of its soundness in maintaining sufficient fiscal stability. National Treasury would have been most pleased by the decline in the country’s bond yield and the strengthening of the rand/US dollar exchange rate (albeit marginally) immediately after the tabling of the budget in Parliament.
The steadfastness of the rand is even more impressive against the background of an up-tick over the past week in the US long-term bond yield (also marginal), which usually takes its toll on emerging market currencies, including the rand.
One of the few irritating aspects of the latest budget was the decision not to adjust the individual tax brackets for the effect of inflation, which is commonly referred to as “bracket creep”. Otherwise, the budget did not contain any noteworthy amendments to the existing functional division of expenditure, nor tax rates – which may be regarded as positive news in the current economic environment.
Although South Africa’s bond yield remains higher than most of its key trading partners, the country’s ratio of public debt to GDP of just above 70% compares favourably to other highly diversified economies – both for high-income countries and emerging markets.
Although much detail is still required in the area of growth enhancing policies, it is encouraging to note that Mr. Godongwana has echoed Pres. Ramaphosa’s stated commitment to much closer cooperation with the private sector in fixing the mess surrounding the country’s infrastructure, especially in energy, roads, harbours and the railways.
Progress with fixing and expanding the logistics network, combined with lower levels of electricity blackouts, an improvement in export commodity prices and lower interest rates (which are imminent), could eventually provide National Treasury with a more pleasant budget task next year!
Composition of government expenditure (functional classification) FY 2024/25 (Rbn)
Composition of government revenue FY 2024/25 (Rbn)
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