Shifting South African Public Sector Borrowing

The South African National Treasury (NT) recently proposed to transfer 30 percent of the unrealized gain on the South African Reserve Bank’s (SARB’s) gold and foreign exchange reserves, worth about 2.4 percent of gross domestic product (GDP), to the NT. The February budget announcement led government bond yields to decline as market participants foresaw a reduced bond supply and lower NT interest payments of about 0.3 percent of GDP. 

The SARB’s need to finance any such transfer implies that the transfer shifts debt from the NT to the SARB. Because the SARB will pay its current 8.25 percent policy (“repo”) rate on the excess reserves that it will use to finance the transfer, the consolidated South African public sector will save less than the 0.3 percent of GDP in interest payments. 

A new working paper from Robert N. McCauley underscores that the savings on government interest payable would be largely, but not entirely, offset by extra SARB interest payments on the additional excess reserves that would result from the proposed transfer under current monetary operating procedures. The key insight is that, from the perspective of the consolidated public sector, the proposal shifts debt from the NT to the SARB, rather than retiring government debt by mobilizing some sterile NT asset. 

Since the NT pays a higher yield on its medium-term debt than the SARB pays on overnight deposits, the debt transfer from the NT to the SARB would reduce interest payments. At current yields, the difference between the government bond yield of about 12 percent and the SARB’s overnight repo rate of 8.25 percent is about 4 percent. Thus, the 2.4 percent of GDP transfer could save the consolidated public sector about 0.1 percent of GDP. The lower bond yields that greeted the announcement of the transfer can be understood as a response to a shortening of the duration of the public sector’s debt. 

Viewing the problem as one of debt management, one can ask whether the SARB most cheaply borrows through excess bank reserves remunerated at its policy rate. Alternatively, it could swap gold for dollars and then dollars for rand in the deep and liquid foreign exchange market. The SARB might well borrow rand the cheaper way. For now, McCauley writes that excess reserves may be the cheaper way to go but that could change.