Rand surges and bond yields drop as Government taps Central Bank reserves to slash debt

By Colleen Goko

The rand strengthened and local bond yields dropped as South Africa said it will tap the central bank’s contingency reserves, lowering the government’s debt trajectory and borrowing requirements.

The currency advanced as much as 0.5% to 18.8100 per dollar by 2:10 p.m. in Johannesburg, after trading flat before the announcement was made. The yield on local bonds due February 2035 dropped seven basis points from closing levels to 11.61%, while the benchmark stock index was slightly down for the day.

The move allowed for a decrease in the amount of debt auctioned at weekly sales and means South Africa will now borrow less to fund deficits. That provides some relief to local bond markets, which have come under pressure this year amid rising US Treasury yields and anxiety over the trajectory of South Africa’s finances.

The National Treasury showed it would lower its gross borrowing requirement through a draw-down from the Gold and Foreign Exchange Contingency Reserve Account, according to the Budget Review published in Cape Town on Wednesday.

The account, which is managed by the central bank on behalf of the Treasury, holds about 500 billion rand ($26.6 billion) in unrealized profits incurred through changes in the value of the rand. From that, 150 billion rand will be used to pay down debt.

The profits in the GFECRA exist on paper unless they are realized by selling the underlying assets. Central bank Governor Lesetja Kganyago has warned that dipping into the nation’s reserves may leave the country more vulnerable to future exogenous shocks.

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