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Amia Capital, a London-based hedge fund, proposes South Africa’s government utilise gains from its central bank’s foreign exchange reserves, suggesting a shift in debt management. The government-owned gold and foreign currency account at the South African Reserve Bank, up almost 50% in value to $25bn, could ease the nation’s rising debt burden. The proposal faces complexities, including concerns about inflation and reserve adequacy. As investors reassess South Africa’s finances amid global challenges, the nation’s debt strain prompts unconventional considerations.
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By Joseph Cotterill of the Financial Times
A prominent investor in emerging market debt has become the latest outfit to float the idea of South Africa’s government using its central bank’s foreign exchange reserve gains to tackle the country’s rising debt burden.
Amia Capital, a London-based hedge fund with about $1bn in assets under management, has joined NGOs in saying president Cyril Ramaphosa’s government should overhaul its debt management by using vast gains recorded on the government-owned gold and foreign currency account at the South African Reserve Bank.
This account has risen by almost 50 per cent in value in the year to March, meaning the $25bn facility is now worth just less than a tenth of South Africa’s gross domestic product.
In a draft research paper seen by the Financial Times, Amia economists Pedro Maia and Annik Ketterle, and Guido Maia, a London School of Economics PhD candidate, argued that parts of the “unusually large” sum could be transferred to the government to alleviate the debt strain on the nation’s economy.
The rise in so-called revaluation gains — which are largely the result of the rand’s fall — has, when coupled with the rise in the interest bill on the government’s debt, meant the cost of not using the funds has soared, the paper claims.
The research underlines how investors are rethinking South Africa’s public finances as it struggles to cope with a toxic combination of higher global interest rates and weak growth.
Using assets at the central bank to cover some of the government’s costs is a complex manoeuvre. Treasuries and investors are often wary of such a move, for fear of stoking inflation or leaving the bank short of reserves to fight currency speculators.
The SARB account has existed for decades, but it has only moved into the limelight this year. The fall in the rand against its holdings has increased its paper value to R459bn ($24.5bn) in March, compared with R314bn a year earlier.
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