ANNUAL REPORTS

Treasury overview
Market conditions
The South African Reserve Bank lowered the repo rate
by 100 basis points during the financial year under review,
culminating in 650 basis points worth of monetary policy
expansion since the start of the easing cycle in December
2008. Short-term interest rates remain at levels not seen
since the late 1970s and early 1980s.
Real GDP growth moved into positive territory (2,8% in the
2010 calendar year), rebounding from the dip of 1,7% in
2009. Consumer price index (CPI) inflation was range-bound
between 3% and 5%, helped by a strong currency for most
of the period. However, rising food and oil prices stoked
fears of inflation towards the end of the financial year.
“The Bank maintains a flexible
and balanced funding
strategy to capitalise on
changing market conditions
and to diversify its
funding sources.”
Ernest Dietrich
Group Treasurer
On a trade-weighted basis, the rand gained 1,4% in
2010/11. This gain paled in comparison to the 25% rally
recorded in the previous financial year. The rand’s
performance was supported by continued robust investor
risk appetite for emerging market assets, against a backdrop
of sovereign debt concerns that kept the US dollar and the
euro on a weak footing.
Once again, the steady strength of the currency had a negative
effect on the valuation of the Bank’s equity investments that are
denominated in foreign currency (predominantly in US dollar),
albeit to a lesser extent than in the previous financial year.
With the Bank’s foreign currency equity investments not
hedged against adverse currency fluctuations, the rand value
of these investments fell, in contrast to prior periods when a
depreciation of the rand resulted in an increase in valuations.
Relative to the end of the previous financial year, the short
end of the South African yield curve moved down during
the year, while maturities beyond five years picked up.
At the short end, this reflected the easing of monetary
policy, while the steady rise in government debt after a period
of dormancy put pressure on yields at the long end.
Although the swap curve continued to trade through the
government curve, the spread narrowed in the year under
review, resulting in a significant negative fair value movement
in the Bank’s portfolio of fixed-coupon bond liabilities hedged
through interest rate swaps. While further normalisation of
the bond-swap spread should continue in the longer term
as monetary policy tightens and hedging activity among
corporates increases, this could potentially be countered by
increased government borrowing.
The yield on the R157 benchmark government bond dipped
by 2 basis points to 7,82% at the end of the financial year,
while the yield on the longer-dated R186 bond increased by
29 basis points to 8,97%.
Funding
The Bank maintains a flexible and balanced funding strategy
to capitalise on changing market conditions and to diversify
its funding sources. Over the course of the year, despite
bouts of volatility and uncertainty, credit market conditions
continued to improve, allowing the Bank to raise new funding
on increasingly favourable terms.
38 DBSA | ANNUAL REPORT 2010/11