15 South Africa1

International Monetary Fund
Published Date:
August 2003
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The South African government securities market has gone through various phases since the late 1970s. No formal and prevailing market rate existed before this period. The government periodically issued bonds at par, when needed. As the market started to develop, the government realized the importance of creating benchmark bonds across the yield curve to increase liquidity. By the early 1990s, a debt trap was looming, and the government intensified its focus on debt management. The government’s macroeconomic framework under the growth, employment, and redistribution program was designed to, among other economic challenges, bring the total debt to manageable levels. As a result, the department of finance developed a framework of philosophies and principles to manage its debt. This led to guidelines and strategies to manage debt more actively.

Today the central government, state-owned entities, and local governments in South Africa are responsible for issuing more than 95 percent of the total fixed-interest-rate securities in the market. The government has taken great care to prove itself a reliable and responsible borrower, domestically as well as abroad. The funding is concentrated in large, liquid benchmark bonds to provide liquidity to the market.

Currently, the government is able to finance the total funding requirement in a sophisticated, liquid, and well-regulated domestic market. Much attention has been paid to the structural, legal, and infrastructural sides of supporting market development. There is regular interaction with the Bond Exchange of South Africa (BESA), the Financial Services Board, and the South African Reserve Bank (SARB) to help with the proper control of the domestic market. The government has also maintained a transparent relationship with the market. Quality information has been made available, particularly on key budgetary figures and funding strategies. As a result, South Africa’s debt management strategy has moved beyond the stage that characterizes most emerging markets, and it is closer to that of developed markets in the industrial countries.

The Domestic Market Before 1990

In the 1970s, new government bond issues were sold as periodic public issues. Typically, the secretary of finance would issue bonds at par three or four times a year, usually to coincide with the date of a maturing bond. There was no active secondary market and, therefore, no prevailing market rate. However, several investigations of and reports on future developments in the capital market of South Africa highlighted the need for changes, among others the De Kock Commission, the Stals report, and the Jacobs report. In 1978, a broad consensus among all market participants was formed, pointing out the real need for market development.

In 1981, Eskom (the Electricity Supply Commission) was the first public entity to issue a bond at a discount to the market. The government soon followed. During the early 1980s, the government issued bonds on an open-ended tap basis until the allotted nominal amount, as specified in the prospectus, was fully issued. For each amount issued, a new bond was introduced to the market. During this period, there was no clear separation between monetary and fiscal policies. Primary issues were used for both financing government spending and open market transactions.

In the mid-1980s, important participants in the capital market established a forum with the South African government to discuss matters of mutual interest. The investment community was partly concerned about the Act on Prescribed Assets. This act was introduced in 1958 to create funds for semigovernmental institutions (such as universities and the South African Broadcasting Corporation) and developments in the former homelands. To fund these institutions, pension funds and insurance companies were obliged to invest part of their funds as prescribed assets in government bonds, government guarantee bonds, and bonds approved and specified by the registrar of pensions (e.g., homeland bonds). Moreover, the investment community was concerned about the small amounts of holdings being kept in a particular bond, some of which were illiquid.

The prescribed assets were a serious stumbling block in the development of financial markets. No prevailing market rate could be determined because of such requirements. The act was finally done away with in October 1989. When prescribed assets were lifted, the scene was set for further market developments in the South African capital market.

In 1989, the then department of finance consolidated several smaller issues to create benchmarks in 5-, 10-, 15-, and 20-year maturities. Furthermore, Eskom and other public entities began making two-way prices (i.e., quoting bid and offer prices) in their bonds.

Developments 1990–98

Developments in the domestic market

Development of the BESA

The development of a formal bond exchange in South Africa originated from recommendations made in the Stals and Jacobs reports. The authorities recognized that self-regulation by the market participants was more desirable and acceptable than imposed control. As a result, bond-trading firms who had run a voluntary association called the Bond Market Association since 1989 were licensed in 1996 as a formal exchange called BESA (the Bond Exchange of South Africa).

To develop the clearing operations, BESA adopted the Group of 30 recommendations on clearing and settlement. The exchange also established a recognized clearinghouse, UNEXcor (Universal Exchange Corporation). Today, BESA members are able to benefit from electronic trade reporting, matching, and settlement. Electronic net settlement takes place each trading day and is facilitated by four settlement agent banks and their Central Depository of South Africa.

Introduction of auctions and market making

In the early 1990s, the SARB had been appointed as the agent to issue, settle, and make a market in government bonds. In September 1996, the department of finance conducted a survey among members of BESA and certain foreign banks to obtain their views on how to improve issuance and secondary market-making activity in government bonds. As a result of the problems experienced with selling primary issues to the market on demand, South Africa decided to adopt the international practice of using regular auctions as a method of selling primary issues of government securities to the market. To ensure efficiency, liquidity, and transparency of the secondary market for government bonds, market participants also agreed with the principle of moving toward formal systems of market making. As a result, primary dealers were appointed, and their main responsibility was to make a market (quoting of two-way prices) and provision of liquidity in the secondary market for government bonds.


Since 1998, the responsibilities of the SARB changed from being an issue, settle, and market-making agent in government bonds to conducting auctions of benchmark bonds according to a fixed program on behalf of the national treasury. The treasury, in a timely manner, informs all market participants about the year’s public sector borrowing program, including the extent of the borrowing requirement, auction dates through an auction calendar, the maturity structure and size of issues, and the instruments to be issued. Seven days before the weekly auction, an announcement is made on what instrument will be issued. The auctions of benchmark bonds are open only to primary dealers.2

Appointment of primary dealers

In 1998, the national treasury appointed a panel of 12 primary dealers, consisting of 6 local banks and 6 foreign banks. The reasons for appointing primary dealers were to reduce refinancing risk for the government, improve the liquidity and efficiency of the government bond market, and create clear and transparent price formation. The introduction of a primary dealer system also supported the development of regulations for trading and investor protection and establishment of a more efficient clearing and settlement procedure. Other benefits of primary dealership include improved market analysis and research.

The criteria to be a primary dealer, set out by the national treasury, require both the local and nonresident market makers to hold a specified minimum amount of rand-denominated capital in South Africa. This held capital is a demonstration by market makers of the capacity to deal with the inherent risks associated with market making. In addition, it shows a firm commitment toward developing the domestic market.

Some requirements were identified to be put in place before the appointment of market makers. It was also decided that a gradual approach to change was necessary to avoid undue disruptions in the market. Two main areas for measures were identified, necessary structural improvements and liquidity enhancing issues.

  • Structural improvements included
    • – creation of an efficient legal framework,
    • – market surveillance of primary dealers by the SARB and the national treasury,
    • – introduction of minimum capital requirements of banks wanting to operate as market makers,
    • – introduction of an auction system to sell government bonds to formal market makers,
    • – dematerialization of bond certificates,
    • – shortening of the settlement period to T+3, and
    • – introduction of the risk management system in the treasury.
  • Liquidity enhancing issues referred to measures aimed to provide sufficient liquidity to the broader market, for example, in ensuring that there is continuous provision of market-related bid and offer prices in appropriate volumes and under all market conditions. These objectives were achieved through introducing benchmark bonds and establishing the repo market.
Other developments

Other developments in the 1990s were, among others, the issuance of the first corporate bond in the South African market by SA Breweries, the establishment of the South African Futures Exchange, and the development of a register, payment, and debt recording system in the debt operation division of the department of finance.

The framework of philosophies and principles

In the early and mid-1990s, an ever-increasing budget deficit, a rising stock of debt, and a rising cost of servicing the debt caused an intensive public debate on the sustainability of the government’s debt-servicing costs. Interest rates were high in both nominal and real terms, and the average maturity of the debt portfolio was just below 10 years, about 60 percent of which had to be refinanced within 5 years. This meant that besides the net new deficit that had to be financed, a high percentage of the existing debt also had to be refinanced in an environment of high interest rates. The threat of falling into a debt trap, and the uncertainty of potential liabilities, triggered a focus on prudent debt management.

In March 1996, an announcement was made in the Budget Review that the entire debt management policy would be reviewed. Following this measure, a framework of philosophies and principles to manage public debt, cash, and risk was developed and approved by parliament to promote a proper understanding of what was to be achieved and further a broad base of support. The framework identified risk areas, as well as the strategies to follow. Following suggestions in this framework, a public debt office was also established. This office was named the asset and liability management (ALM) branch of the department of finance (the department of finance is today called the national treasury). The following chart illustrates the current structure of the ALM branch.

The Evolving Debt Management Strategy Since 1999

The performance of the South African capital markets during the 1997–98 financial crises proved that the South African government bond market was no longer at a nascent stage. However, at the same time, it was evident that debt management objectives had to change to face new challenges. The willingness of the investors to commit their funds at the long end of the curve (27-year maturity) and the active participation of foreign investors signified the need to change the debt management approach. A research paper titled “Comprehensive Debt Management Framework” identified certain policy gaps that had to be addressed. The paper proposed that debt management objectives should be changed, including recommendations for a tactical debt management approach.

Identifiable policy and instrument gaps

ALM Branch Structure

a. Public Finance Management Act.

  • Design and use of instruments: Although low-cost debt instruments such as inflation-linked bonds were introduced, there was a need to consider introducing the low-coupon, fixed-rate bond. The design and use of low-coupon instruments is in line with the government’s policy of introducing inflation targeting, which has helped to reduce unreasonable expectations about the future of the inflation rate. New low-coupon bonds have been successfully used as a destination bond in switches.
  • Use of derivatives: Derivatives were not used when South Africa was still developing a risk management framework. However, this could change in the near future. Discussions are going on regarding the use of derivatives, such as separate trading of registered interest and principal of securities (STRIPS)3 and interest rate swaps.
  • Maturities: The capacity at the short end was limited. Switches between different maturities have been offered to the market to restructure the maturity profile of outstanding debt.
  • Proper coordination of the funding activities of state-owned enterprises (SOEs): To ensure a smooth, efficient, and predictable securities market, there was a need to harmonize government borrowing with the SOEs. The public sector borrowers forum was launched on May 31, 2001, to organize the funding activities of the public sector issuers. The forum consists of the parastatals, the Financial Services Board, the SARB, and the national treasury.
  • Coordination of liability management and monetary policy: There was no coordination between liability management and monetary operations. Consequently, a detailed work plan for the public debt management committee, which consisted of high-level decision makers from the national treasury and the SARB, had to be formulated.

Change in the hierarchy of debt management objectives

Based on the analysis in “Comprehensive Debt Management Framework,” debt management objectives were changed. Before 1999, the primary objective of debt management was to develop the domestic capital market, and the secondary objective was to promote a balanced maturity structure. Developments in the domestic market changed the emphasis of these objectives. The primary objective shifted to focusing on the reduction of the cost of debt within acceptable risk limits, and the secondary objective, to ensuring government access to financial markets and diversifying funding instruments.

A shift from strategic to tactical debt management

The national treasury acknowledged that while the objectives of South African debt management were now prudent; developments in the global sovereign capital markets necessitated a change from strategic to tactical debt management in South Africa. The strategic debt management policy looked at the overall design and implementation of the debt management program. This includes how primary issuance is designed and managed, how debt instruments are designed and traded, and how liquidity is provided. Tactical debt management policies concentrate on actively managing the outstanding stock of debt and its composition to reduce the cost of debt to within acceptable risk limits.


Notable achievements in implementing new debt management approach cover improved domestic bond market liquidity. The total South African bond market turnover increased from R 5 trillion in 1997 to about R 11 trillion in 2000. The government bond proportion of total market turnover has also increased, from about 55 percent in 1995 to 91 percent in 2000. Moreover, investor confidence has risen, as has the participation of foreign investors in the domestic bond market. Meanwhile, the perceived risk associated with foreign investment in South Africa has continued to decrease with rising efficiency, sophistication, and openness in the South African capital market. Evidence of this was the fact that South Africa was one of the few countries to issue and fund in the longer-dated bonds during the 1997–98 financial market crises.

The Main Challenge Facing the National Treasury

The government’s budget deficit as a percentage of GDP decreased from 5.1 percent in fiscal year 1994/95 to 1.5 percent in the 2001/02 fiscal year. The main challenge facing the national treasury today is to find ways to uphold an efficient, transparent, and liquid government bond market in an environment with declining borrowing needs. The decline in the supply of government paper is often interpreted as a decrease in the liquidity of the bond market, especially in those countries whose securities markets are still at a nascent stage. However, South Africa has reduced its supply of paper in line with the government’s lower financing needs, without sacrificing liquidity in the bond market. The country has managed to achieve this by carrying out active debt management strategies with use of tools such as debt consolidation (switches) of bonds and debt buybacks. Inflation-linked bonds have also been introduced, and a facility to strip government bonds has been established. Swap derivatives will be introduced in due course.

Debt consolidation (switches)

Debt consolidation was introduced to reduce the fragmenting of bonds on the yield curve and thereby improve the liquidity of the benchmark issues. Debt consolidation has also helped to smooth out the maturity profile and reduce the refinancing risk, easing the pressure at the short end of the curve. The number of outstanding issues of small amounts and high coupons has been converted (switched) into larger liquid bonds with low coupons. To execute the debt consolidation (switches), exchange auctions have proved to be a powerful tool. Exchange auctions have also been used as a cash management tool. As at the end of 2001/02 fiscal year, a total of R 52 billion in bonds had been switched.

Debt buybacks

With the objective of reducing the government’s debt-servicing costs in the medium to long term—and strengthen the integrity of the government securities market—small, illiquid, high-coupon bonds of less than R 1 billion as well as ex-homeland bonds have been bought back from the market. At the end of the 2001/02 fiscal year, R 4.5 billion of illiquid bonds had been bought back.

Inflation-linked bonds

To reduce the long-run cost of debt, the ALM branch has embarked on the design of instruments that can lower the overall cost of debt for the government, such as the issuance of inflation-linked bonds. Inflation-linked bonds give institutional investors a chance to match long-term assets and liabilities, while also providing an objective measure of inflationary expectations and acting as a benchmark for other issuers. These bonds were considered a mechanism for unlocking the liquidity of the long-term fixed-rate bonds, because inflation-linked bonds tend to attract the buy-and-hold investors. By switching into inflation-linked bonds, institutional investors released long-term fixed-rate bonds in the secondary market to trade, thereby increasing liquidity on the long end of the curve for long-term, fixed-rate nominal bonds.

South Africa has developed a full inflation-linked bonds curve with 2008, 2013, and 2023 maturities. These bonds had an average yield of 4percent as of May 20, 2002. However, as in other similar markets, the liquidity in the South African inflation-linked market is low, because these bonds mostly are bought by investors who tend to hold the bonds to maturity. The primary dealers do not have any price-making responsibilities on inflation-linked bonds.

Stripping of government bonds

The ALM branch undertook a project of discovering whether the STRIPS system improves the liquidity of the underlying instruments. The project pointed out that STRIPS could increase demand for the underlying instrument and encourage active portfolio managers to take advantage of arbitrage opportunities through stripping and reconstitution. Under conditions of declining government funding, the project discovered that it was clear that it was necessary to introduce a STRIPS program to maintain the liquidity and integrity of the domestic capital market. Trading in STRIPS began at the end of January 2002 through primary dealers acting as market makers. The Central Depository of South Africa acts as a government agent in stripping government bonds. By introducing a strip facility, the national treasury discouraged investment banks from creating their own special purpose vehicles, whose sole responsibility is to strip government bonds for market participants.


To manage the duration of the government’s debt portfolio, the national treasury’s liability management division is introducing interest rate swaps as instruments for cost and risk management. Moreover, with government participation in the swap market, it is assumed that the liquidity of both the swap market and the underlying bond market will improve.

Foreign Borrowing

Political unrests due to apartheid system in 1984 and 1985 resulted in sizable capital outflows. The fiscal and monetary decision makers were forced to enter into a partial debt standstill.4 According to a SARB census, South Africa’s indebtedness on August 31, 1985 was US$23.7 billion (41.4 percent of GDP), US$13.6 billion of which was deemed to fall under the debt standstill. The repayment of this part of the debt was executed under four debt standstill agreements starting in 1985. The final repayment under these agreements was made in August 2001.

After a period of restricted access, the South African government was able to return to the foreign market in 1994 after the election of the first democratic government. The first issue after this return was a U.S. dollar global bond issue, followed by a yen bond issue in 1995. The government also set up an EMTN (euro medium-term note) program.

Since then, an integrated strategic approach has been followed when entering the foreign market to fund the budget deficit, as stipulated in the Budget Review each year. Usually, foreign funding has amounted to US$1 billion per fiscal year. However, the prime focus has not been for funding purposes, but to create benchmarks in specific foreign markets for other South African entities to follow. This is mainly because South Africa is capable of funding its total budget deficit from the domestic capital market only.

The strategy of borrowing in the foreign market so far has been to exploit perceived pricing anomalies to obtain cost-effective funds. Moreover, in the future, the foreign debt management will also focus on promoting the rand market by taking advantage of the South Africa’s positive credit-rating development whenever possible.

Risk Management Framework

From 1996 to 1999, three financial risk management objectives drove the ALM branch, namely controlling the quantum of capital, optimizing the return on capital, and managing the cost of capital, each described in the following.

Controlling the quantum of capital

As mentioned before, the debt issued by the state, and the cost of servicing this debt, were at a high level in the mid-1990s. In this light, a distinction was made between two different broad areas of risk:

  • Risk of ever-increasing deficit: This risk was not seen as the primary responsibility of the ALM branch. The primary responsibility for managing this risk was guided by the implementation of the government’s macroeconomic framework, the growth, employment, and redistribution program.
  • Risk of ensuring cash availability to meet the state’s expenses: The liability manager was given direct responsibility for
    • – ensuring the state’s continued access to financial markets, both domestic and foreign;
    • – contributing to the absorption capacity of state debt within these markets through ongoing market development, product innovation, and proper coordination of activities with the SARB’s monetary management operations;
    • – developing efficient secondary markets for its securities; and
    • – establishing the state’s name as a fair and efficient borrower in the financial markets through the active marketing of its debt instruments.

Optimizing the return on capital

The ALM branch was interested in investments relating to surplus cash arising because of overall funding requirements and ensuring liquidity needs. The level of surplus cash was largely affected by cash management activities. However, from a risk management perspective, a certain level of investment was kept as a liquidity buffer. The return on capital invested in programs and projects through the budgetary process did not concern the ALM branch.

Managing the Cost of Capital

An integrated strategy was followed for domestic and foreign borrowing. It was accepted that savings in the cost of debt service could be achieved from the ongoing development of the depth and width of the domestic financial markets, rather than through efforts to borrow more cheaply in foreign markets. Because of the size of South Africa’s domestic debt, limited scope existed for actively managing the debt portfolio and reducing debt-servicing costs. The focus of existing domestic debt management aimed, therefore, at addressing the maturity structure to avoid unwanted bundling across the debt profile. Although funding of the new gross financing need (new issues) was managed actively, cost savings were not achieved by taking interest rate views.

The principles regarding individual risk categories concentrated on these risk areas:

  • Liquidity risk: The management of this risk, considered by the ALM branch to be the most important, involved ensuring that the minimum amount of cash was always available to meet the state’s expenses. Further explanation of liquidity risk will be covered under the section on cash management.
  • Interest rate risk: This risk meant that adverse changes in interest rates could cause an increase in borrowing costs. It was accepted that the state’s minimum risk position was in long-term, rand-denominated debt. A duration target was established to control the interest rate risk. No interest rate view was taken as a means of achieving cost savings.
  • Credit risk: In the course of managing cash balances and derivatives positions, the guiding philosophy and principle was that the role of the ALM branch, in managing the state’s market risk, involved a transfer of that risk to the marketplace in return for the credit risk of the counter-party. The state’s size in the financial markets necessitated accepting credit risk from a far wider range of counter-parties. With the exception of liquidity, no counter-party or issuer was exempt from the process of having a credit limit imposed. Transactions could be conducted only after formal limits were set with counter-parties and issuers that satisfied soundly based and acceptable assessment processes.
  • Foreign exchange risk: It was accepted that it was not appropriate for the ALM branch to hedge foreign loans raised by the state through the rand, because the foreign currency debt represents just a small part of the total debt. Instead, the national treasury regards controlling the level of foreign currency debt as essential.
  • Market-making risk: It was accepted that this risk should be limited and confined to debt markets. Market-making activities in South African bonds were removed from the government (the role that was played by the SARB as an agent of the government) and transferred to the market when primary dealers were introduced in 1998. Thus, the risk of fluctuations in the market was shifted to the market participants, where it was deemed to belong.
  • Trading and ethical risk: Primary dealers took responsibility for trading and ethical risk. A code of conduct was drafted, documented, and signed between primary dealers and the ALM branch. The code of conduct addressed the issues of business ethics, relationships, due diligence, confidentiality, controls, and trading rules.

Setting up the capacity to assess and manage cost and risk

In 1999, a risk management project was introduced. Its purpose was to set up a separate section within the ALM branch that would be solely responsible for managing risks of the government portfolio. In 2000, a risk management team was put in place to run the project. The chief directorate of the strategy and risk management controls and manages risks that are identified and debt it is exposed to. Specific risk management responsibilities within the context of the ALM branch are to

  • create and maintain a risk management framework for general government bodies and public enterprises,
  • develop an ideal benchmark for government debt, and
  • monitor and manage credit risk exposure.

Risk management today

Because of the developments that have taken place in both the domestic and foreign markets, the national treasury has resolved that the risk management framework adopted in 1996 needs to be realigned. This is mainly due to the fact that debt management practices have evolved, and more emphasis is now placed on advanced tactical and quantitative models, rather than just on policies. Although the risks identified are still the same, the new model in each case ensures that policies and procedures to quantify, control, and manage risk exposure are now put in place. Table II.15.1 summarizes the types of risk and the management of these risks.

Table II.15.1.Management of Risk
Type of riskManagement of risk
1. Liquidity and refinancing risk Short-term liquidity
  • Monitor exchequer cash balance and flows.
  • Maintain a certain minimum cash balance.
  • Maintain access to short-term borrowing.
  • Limit size of short-term debt.
  • Prefinance maturing debt.
  • Smooth the maturity profile.
  • Extend portfolio maturity.
  • Develop liquid benchmarks.
Long-term liquidity
2. Interest rate risk
  • Manage ratio of fixed- vs. floating-rate debt.
  • Manage ratio of short-term vs. long-term debt.
  • Manage nonparallel yield curve shifts.
  • Use interest rate swaps.
3. Currency risk
  • Domestic vs. foreign debt.
  • Use of currency swaps.
  • Manage short-term vs. long-term debt.
  • Composition of currencies.
4. Budget risk
  • Modest short-term borrowing.
  • Reduce volatility of short-term interest rates.
  • Monitor actual vs. debt service costs.
  • Stress-testing (implemented in 2002).
5. Credit risk
  • Set overall counter-party credit status, for example, rating (implementation started in 2002).
  • Set individual counter-party credit limits (implementation started in 2002).
  • ISDA mitigation clauses (implemented in 2002).
6. Downgrade risk
  • Identify key factors that are important in the credit-rating process.
  • Develop a culture of consistent messages between other departments and the international community.
7. Operational risk
  • Put policies and measures in place to control back office operations and payments.

Benchmark for management and performance

To ensure accountability and the delegation of risk, the government has approved a benchmark that should reflect and establish an acceptable level of risk and target costs. The benchmark reflects the defined debt management objectives and acceptable quantifiable risks, and it expresses the government’s strategic debt position and aligns debt policy to economic policy. Altogether, the benchmark provides appropriate risk management and control and forms a baseline for measuring the performance of debt managers. The benchmark was formulated under these principles:

  • Robustness: A conclusion should rely on few assumptions.
  • Efficiency: The government should be able to take the least possible risk for a certain cost.
  • Mark-to-market valuation: The government should be able to measure savings and cost over the lifetime of the debt.
  • Risk context: Risks should be constrained to the annual debt-service expense.
  • Transparency: There should be an open basis for performance measurement.

Cash Management

Both the cabinet memorandum of February 1997 and the Public Finance Management Act require cash management in the ALM branch to provide a framework for creating awareness in all spheres of the government of the need for proper cash-flow management. The responsibility to plan and manage the government’s daily cash-flow needs was officially taken over from the SARB in June 1999.

To ensure enough funds are available for the state to meet all expected and unexpected financial commitments, it is necessary and prudent to keep an appropriate level of cash and near-cash. It is therefore important to optimize returns on cash balances. Therefore, the cash manager’s responsibilities are to

  • manage liquidity by ensuring that the right amount of funds are available in the right currencies, at the right time, and in the right place;
  • plot projected flows and monitor the actual flows against projections: Timely and accurate future cash-flow projections are critical to plan the funding of the national revenue fund effectively, minimizing the required liquidity buffer and maximizing returns on surplus cash;
  • create an appropriate organizational structure; and
  • engineer the required linkages between the tax and loan accounts, the paymaster general accounts, and the departmental accounting systems.

During the early 1990s, the then department of finance introduced a tax and loan account system. It opened four tax and loan accounts with each of the four major domestic banks in South Africa. Surplus funds in the exchequer account, kept at the SARB, are deposited into these accounts daily. When spending occurs, funds flow back via the exchequer account to the various departmental accounts. This establishes daily outflows from the accounts.

Since June 1998, the difference between projected daily cash flows and actual cash flows has been maintained daily. Taking control over cash-flow estimates, and more accurate information on projected monthly and daily cash flows, have made it possible to plan and draw up proposals on financing needs more accurately. Also, the active use of treasury bills, issuing of short-term (one-day) treasury bills to finance cash-flow peaks, and investments by the Corporation for Public Deposits (an organization that manages short-term public funds and is part of the SARB) has contributed to cash-flow management carrying lower cash balances ahead of cash-flow peaks.

Managing Investor Relations

The national treasury also attaches greater significance to managing investor relations and has set up an annual investor relations program, which includes road shows, primary dealer meetings, and one-on-one meetings with investors and other market participants, such as banks, fund managers, and the like.

The annual road shows are intended to promote the exchange of ideas between the national treasury and investors (foreign and domestic) on issues of mutual interest. This could, for example, involve discussions on funding needs, new instruments and projects proposed by the ALM branch, and any concerns about the market.

At the establishment of the primary dealership, the national treasury, the SARB, market makers, and the BESA agreed to coordinate their responsibilities to ensure a transparent and efficient bond market. All new strategies have been discussed with market participants, and they have been encouraged to submit their comments. The national treasury has adhered to its annual funding strategy, and any unplanned events have been avoided. Furthermore, the ALM branch within the national treasury and the money and capital market division of the SARB have had a formal program of meeting primary dealers to discuss their performance in the primary and secondary markets and capital market issues of mutual interest.

The ALM branch and the money and capital market division of the SARB have also held discussions with the top management of various capital market participants.

Legal Framework for Issuing Government Debt Instruments

The Public Finance Management Act forms the basis for financial administration in the South African government. The act

  • regulates financial management in the national and provincial governments;
  • ensures that all the revenue, spending, assets, and liabilities of those governments are managed efficiently and effectively;
  • provides for responsibilities of people entrusted with financial management in those governments; and
  • incorporates the regulations on borrowing by public entities (It does not allow provinces to borrow from abroad.).

The act also stipulates the limits on borrowing, guarantees, and other commitments. To improve accountability of debt management, the act settles who should

  • borrow for the government;
  • issue a guarantee, indemnity, or security; and
  • enter into any other transaction that binds the government.

The act also lists the purposes for which the minister of finance, as an executive authority, may borrow money. These are to

  • finance the national budget deficit,
  • refinance maturing debt or a loan paid before the redemption date,
  • buy foreign currency,
  • maintain credit balances on a national revenue fund bank account,
  • regulate internal monetary conditions should the need arise, and
  • for any other purpose approved by the national assembly by special resolution.

Concluding Remarks

South Africa has gained valuable experience and learned important lessons in public debt management. The most significant lesson the government has learned was the importance of having a debt management framework to deal with the mounting debt that was threatening South Africa. The framework identified risk areas, as well as the strategies to follow. Of special importance in the implementation of the framework have been

  • the development of liquidity in both financial instruments and the capital market;
  • the development of a yield curve and the issuing of bonds over the spectrum of the yield curve;
  • the diversification of fixed-income instruments such as floating- and variable-rate bonds, fixed-interest bonds, and inflation-linked bonds;
  • market making, trading, and investment risks were transferred to the market through the appointment of primary dealers;
  • the opportunity to issue bonds in a proper, well-structured (regulated), and developed market; and
  • introduction of cash management, with an emphasis on actively managing cash balances (This entails the daily monitoring of actual flows against projections.).

Today, the inherent conflict between debt management and monetary policies is now well understood. A clear separation of activities has been introduced, and existing conflicts have now been dealt with in the appropriate manner.

To reduce costs, a gradual approach has been followed, from emphasizing market development to actively taking positions in the market. This enables the government to actively manage its outstanding stock of debt and the composition of this debt. It also has become critical to identify, control, and manage the government’s risk exposure. The national treasury’s ALM branch has actively managed these risks, guided by a comprehensive risk management framework.

Establishing and maintaining a good relationship with investors, both locally and internationally, has been one of the priorities in promoting the South African bond market. The investor relations program, run by top management in the national treasury and the SARB, has increased the transparency and openness of the bond market and encouraged investor confidence in the government’s ability to manage debt.

Although all of these issues are important, it is crucial to note that the South African bond market could not have been so efficient without a prudent macroeconomic framework and a well-constructed legal framework.


The case study was prepared by the National Treasury of the Republic of South Africa.


Information is available on the web site,


The interest and principal components of a security are split into separately tradable instruments.


Deferred of government debt.

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