The rand strengthened and municipal bond yields fell as South Africa announced it would draw on its central bank's emergency reserves and lower the government's debt trajectory and borrowing requirements.
The currency, which had been flat before the announcement, had risen by 0.5 percent to R18.81 to the dollar by 2:10 p.m. in Johannesburg. The yield on municipal bonds due in February 2035 fell 7 basis points from the closing price to 11.61%, and the benchmark stock index fell slightly on the day.
The move will allow for a reduction in the amount of bonds auctioned at weekly sales, meaning South Africa will have to borrow less to finance its deficit. This will provide some relief to the municipal bond market, which has been under pressure this year amid rising US bond yields and worries about South Africa's fiscal trajectory.
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National Treasury will reduce total borrowing requirements through withdrawals from gold and foreign exchange contingency reserve accounts, according to a budget review released in Cape Town on Wednesday.
The account is managed by the central bank on behalf of the Treasury and holds about 500 billion rand ($26.6 billion) in unrealized gains from fluctuations in the value of the rand. R150 billion of this will be allocated to debt repayments.
GFECRA gains exist on paper unless realized through the sale of the underlying assets. Central Bank Governor Lesetya Kganyago warned that draining the country's foreign exchange reserves could make it more vulnerable to future exogenous shocks.
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