Back in early 2010 former DA leader Tony Leon was still finding his feet as our ambassador in Buenos Aires, Argentina. For reasons I’m still not sure about, but for which I’m eternally grateful, he invited myself and two other editors — Mondli Makhanya and Tim du Plessis — to visit.
Leon is a brilliant networker and the highlight of the trip for me was an early meeting with Martin Redrado, an imperious and deeply intelligent man who had just days earlier resigned after six years as president of the Argentine central bank. He had tried and failed to stop the country’s then president, Christina Kirchner, from getting her hands on the country’s foreign exchange reserves to pay off public debt and keep funds rolling into her populist programmes.
As the 2024 budget approaches, that meeting is an uncomfortable reminder that a replay (of sorts) is about to unfold in SA. It is an altogether more gentle affair here, and no-one will get fired. But the scene is uncomfortably familiar. Our debt burden is becoming unpayable and the government wants access to the Reserve Bank’s money.
It needs to be said that we manage our finances far better than Argentina, which has on numerous occasions defaulted on its debt. Its debt has traditionally been in dollars. Ours is mainly in rand. Nonetheless, fiscal pressure requires painful policy decisions governments would rather not make, especially with elections looming. Our public sector borrowing requirement — the money the government needs over and above taxes and other income — is about R600bn a year, and paying the accumulated borrowings back now costs us an eye-watering R2bn a day.
Part of finance minister Enoch Godongwana’s job in the budget is to explain how he plans to manage that debt, and late last year, like manna from heaven, he was presented with an opportunity hardly anyone appreciated. Back when Tito Mboweni became governor of the SA Reserve Bank, the Bank’s foreign exchange reserves were $26bn, enough to cover a few weeks of imports. I remember him saying he was going to slowly raise them north of $50bn. And he did, something we should all be grateful to him for. When I checked this week the Bank’s reserves were worth $62bn, or more than R1-trillion.
As a constitutionally independent central bank, the Reserve Bank’s carefully curated reserves have long been considered untouchable — until last year when hedge fund analysts in London wrote a paper identifying an obscure account in the Bank’s books called the Gold & Foreign Exchange Contingency Reserve Account (GFECRA), which contained almost R500bn. They said the government should access it to keep debt repayments under control.
The GFECRA R500bn exists on paper only though. In essence it is accounts for the growth in the rand value of the dollar and other forex reserves caused by the fall in the value of the rand over time. Put another way, if you had spent the past 20 years investing your capital in a safe haven offshore but recently decided to buy yourself a Range Rover in Johannesburg, bringing back some of the dollars you’ve carefully stashed away to pay for it would be a lot easier now than when the rand was stronger. You would get more rands for your dollars than you spent buying the dollars in the first place.
The Reserve Bank initially warned that to monetise the GFECRA, or part of it, it would have to physically sell some of its dollars. But economists have argued that may not be the case. The government could simply print the rands required, and that would neither be inflationary nor spook the markets because it would still be underpinned by the physical forex. Many governments, the hedge fund analysts wrote, do this already.
I’m sure they are right. And if the Treasury and Reserve Bank are able to agree on some sort of GFECRA transfer rule that doesn’t require changes to the Reserve Bank Act, I’m also sure Godongwana will be announcing the miraculous appearance of a few hundred billion rands to save the day when he presents his budget on February 21.
If he does it will also mean Bank governor Lesetja Kganyago has walked back his initial opposition to a deal with the Treasury. “The notion that thinks there is some pot of gold hidden at the Reserve Bank and all that’s needed is to figure how to get into it and, bingo, all our problems are solved, is very simplistic and, at worst, is actually very reckless in terms of policy,” he said at the end of last year.
But that is, sort of, what is going to happen. Sure, the two sides might agree on a gentlemanly amount to take now and over the next few years, and the markets might respond positively. The cost of borrowing may even come down a little. But all that will happen because the markets will now assume the GFECRA money is in the pot, so to speak.
The politicians will too, make no mistake. The ANC never saw a pile of money — even paper money — it didn’t want to eat or to use to buy the public off with welfare. Hell, just how many BMWs and Range Rovers have we taxpayers had to cough up for? They’re in that GFECRA somewhere. And while the GFECRA “money” might be relatively safe now, what happens in five years’ time? Paul Mashatile may be the next president. Nothing we know about him suggests he sets much store by probity, hard work and tough choices.
Worse, rumours suggest Godongwana is not well. Kganyago’s term ends in November. Will he be reappointed? Does he want to be? There’s always a tension between central banks and politicians, but as the Redrado case reminds us, the politicians always win. When West German Chancellor Helmut Kohl wanted to reunite West and East Germany with a populist currency union in 1991, his powerful Bundesbank chair, Karl Otto Pöhl, objected. Kohl won and Pöhl resigned. We may not be there yet, but I think something deeply troubling is about to happen.
• Bruce is a former editor of Business Day and the Financial Mail.
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