Defend Truth


Raiding the Reserve – watershed moments of SA’s economic decline


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

Amid unceasing news feeds and doomscrolling, it can be hard to get perspective. Yet last week, two events clarified the economic trajectory of South Africa and how the previously unthinkable has now become reality.

First was the annual Budget Speech, delivered by the minister of finance, Enoch Godongwana. Most of the commentary has been broadly complimentary, describing it as “plausible” and even “reassuring”. 

While the initial market reaction was positive, after masticating on the details it seems investors are less sure. The ZAR initially strengthened to under R19 against the US dollar, but has subsequently sold off to almost R19.4.

Clearly the longer term implications of the headline grabbing measure announced – Treasury’s grab of R150-billion in gold and foreign exchange “paper profits” held at the Reserve Bank – are only now being fully processed. 

This is an unprecedented step, at least since 1994, and compels a number of questions to be asked. 

First, what are gold and foreign reserves meant for, and specifically those held in the Gold and Foreign Exchange Contingency Reserve Account, or GFECRA, at the Reserve Bank? 

Essentially, they are there to ensure the government has backup funds if the rand rapidly devalues or SA becomes insolvent. They are the ultimate national insurance policy or rainy day savings account. 

It is therefore inarguable that spending these funds makes South Africa more vulnerable in the (not entirely implausible) event that the world decides not to continue financing the country’s deficits or buying its currency.

Second, where do these so-called paper profits come from, and what are they being spent on? 

After all, if Treasury is only spending profits, and not the holdings themselves, surely that is not in itself a disastrous thing? And herein is the remarkably paradoxical and circular reality of the situation. 

The profits of these assets have largely accrued as a result of the ZAR’s depreciation against foreign currencies and hard assets over the last two decades. 

This depreciation is largely due to the increasingly precarious situation in which the SA economy finds itself through low productivity, stagnant growth, rampant corruption and persistent current account and budget deficits. 

Therefore, the very weaknesses which have hobbled the economy created these paper profits that are now being used to alleviate the country’s parlous finances, and which are also a result of those same structural economic failings. 

However the hard currency valuation of these holdings – ostensibly the only valuation which matters for foreign reserves – has not changed.

According to Treasury, spending these profits does not worsen the fiscal outlook as they are only being used to pay down existing debt. 

“There is no association between GFECRA and what is happening on the spending side,” Treasury Director-General Duncan Pieterse told reporters ahead of the Budget’s delivery in Parliament. 

Yet this is simply not entirely true; budgets, by their very nature, are “fungible”. Funds from reserves used for one potentially productive end (paying down debt) frees up resources to be used for less productive ends (such as bloated state sector wages). 

Whichever way one looks at it, SA is selling the family silver to fund its expenses.

A corporate failure watershed

Second was the announcement on Thursday by Pick n Pay. This grocery business has been a cornerstone of the South African corporate establishment for almost 60 years – a once-loved brand and for many decades a “blue chip” on the JSE. 

Under Raymond Ackerman it became a byword for management excellence and prudence. 

To see such a business announce that it has to do an emergency R4-billion rights issue and a likely spin-off of Boxer, its only profitable division, to shore up its once fortress-like balance sheet, is a watershed in the history of corporate SA. 

At one point it was business in SA which was seen as being the bulwark against economic collapse. Saddled with a dysfunctional public sector, at least SA had world-class corporates to drive investments and productivity – or so the theory went. 

We were grossly mistaken. 

There is not enough space here to delve into the litany of corporate failures, scandals and misadventures undertaken by SA Inc in recent decades. 

Brait, Steinhoff, Sasol, Spar, EOH and Tongaat are but a few. Pick n Pay is just another depressingly familiar story of SA Inc’s fall from grace. The rot is endemic.

With hindsight, this has been coming for some time. 

The Ackerman family has for several years been accused of running the business for lucrative dividends and not in the best interest of minority shareholders, employees and customers. 

Management has historically paid out a far larger share of earnings per share than rivals such as Shoprite, which has invested more into critical infrastructure such as distribution centres and IT. The long-term effects of that underinvestment are now clear. 

Perhaps this is a moot point. Events such as Treasury raiding the Reserve Bank, and the failure of Pick n Pay, cast the reality of South Africa’s economic decline – in both the private and public spheres – into sharp relief. 

We are entering unchartered waters. DM


Comments - Please in order to comment.

  • Ben Harper says:

    The anc need to fund their election campaign, that money has likely disappeared already

  • G C says:

    You cant equate bad decsions made at Pick n Pay to the rest of South Africa. All around the world there is companies making short term business decsions which come back and bite them in the arse. I do agree with your thoughts about the Reserve bank selling the family silver is a negative message to the outside world. Plus once the ANC have crossed this threshold they will be back for more money next year.

  • Jan Vos says:

    This is only to be expected in a country rotten with corruption and incompetence. When the RMS Titanic was sinking, the band played “Nearer, My God, to Thee.” As the RSA is going down, the band is playing “Bobbejaan Klim die Berg.” Enjoy.

  • Pete Mitchell says:

    The GFECRA decision was based on an extensive (year-long) analysis of global best practise, alongside officials from the IMF. It is not causal to the recent rand dollar decline (in what information age does it take investors a week to unpack a speech). Similarly corporates, including blue chips, ride individual rollercoasters that can’t easily be used for symptomatic claims. What of Checkers? The reality is that the two topics of this article are unrelated and rather highlight leadership at each end of the spectrum: considered long-term government decision-making (for a change, and let’s not pass up the opportunity to celebrate something good in these dour times) versus short-term corporate greed.

    • Natale Labia says:

      Please note at no point in this piece did I claim these two events were related other than they both happened last week – and I think they are instructive of broader realities and shifts. On the the NT; even considered long-term decision making can be indicative of desperate and worrying realities.

  • Jacqueline Kinnear Kinnear says:

    What happens when the family silver runs out. Surely we must cut expenses or make money by improving our economy. It’s obvious surely. What’s the end game here for South Africa? I can’t find a single article in the current news to feel even a tiny sliver of hope. From starving people in the Eastern Cape, visa applications not getting processed, illiteracy after 5 years at school, gas drying up in 2026 after 6 years of complaining, load shedding, housing shortages, gender based violence in Montegu being ignored. The list is endless. How can the people of South Africa continue on this trajectory and still find hope in the future. Something’s got to give and it can’t be the citizens again.

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