/ 8 August 2013

July rise in reserves a first for the year

July Rise In Reserves A First For The Year

Gold price movements remained the primary economic driver, pushing South Africa's gross international reserves up to $47.3-billion in July from $46.9-billion in June – the first upward movement recorded since the beginning of the year.

"The bulk of the change in gross reserves can be ascribed to an upward revaluation of gold reserves by $500-million to $5.3-billion. This boost stemmed from the rise in the international gold price between June and July," Investec economist Kamilla Kaplan said on Wednesday.

The dollar-denominated gold price rose by 10.4% on the month to $1 321.25/ounce in July, the strongest monthly rise in the year so far, prompted by subsiding concerns of withdrawal of quantitative easing in the US. 

Although an upward shift, this outcome was slightly lower than the consensus forecast of $47.55-billion, said Kaplan.

The Nedbank Group Economic Unit said the rand value of gross reserves declined marginally over the month, owing to the rand appreciating against the dollar. The rand gained 0.9% to R9.906 against the US dollar as speculation that the US Federal Reserve was about to temper its bond purchase programme dominated markets over the month, hurting the US unit. 

A country’s reserves offer a fuller view of the balance of payments. Nedbank chief economist Dennis Dykes said, theoretically, reserves give you a handle of capital account and trade account movement. If reserves are plunging the bank would be considered in trouble, but if building up reserves, the bank would be viewed as in a good position.

"But keep in mind it is a snapshot picture, it is just one day of the month looking at their balance sheet. It doesn’t give you an accurate picture of what is happening in the rest of the month at all," Dykes said.

Policy stance
Analysts foresee the Reserve Bank as holding firm on its accommodative policy stance.

The Nedbank Group Economic Unit said uncertainty in financial markets and unfavourable growth prospects will contain the Reserve Bank's ability to accumulate reserves in the months ahead.

Kaplan said it is likely the Reserve Bank will continue to build reserves during periods of rand strength. And "any strengthening in the rand in the coming quarter will bode well for the inflation trajectory. 

"Currency strength dampens inflation and a dissipation of inflationary pressures, which we expect in the fourth quarter of 2013, will provide the South African Reserve Bank with the room to keep monetary policy accommodative in the weak economic growth environment."

The Nedbank Group said the Reserve Bank will continue to focus on balancing growth and inflation prospects. 

"Recent indicators suggest that the local economy is struggling to pick up momentum and that demand-driven inflation remains contained. However, risks to the inflation outlook are still on the upside. This, along with the poor economic growth outlook, is likely to persuade the Reserve Bank to maintain its accommodative monetary policy stance well into 2014."