South Africa needs to shield itself against capital outflows by boosting its foreign currency reserves, says Reserve Bank governor Gill Marcus.
South Africa needs to boost foreign currency reserves to shield the economy against the risk of capital outflows, said central bank governor Gill Marcus.
Reserves "are low by comparison with our emerging-market peers", Marcus told lawmakers in Cape Town on Wednesday. "The need to accumulate these reserves has been driven by the need to reduce our vulnerability to sudden large outflows of capital, something that is regarded as a real risk."
The rand has lost 15% against the dollar this year as the US Federal Reserve contemplates reducing its $85 billion-a-month monetary stimulus program that’s helped to support global growth. The World Bank and International Monetary Fund warned this week that South Africa is vulnerable to the risk of capital outflows.
While the nation’s central bank has boosted gross reserves over the years to $50.02-billion in September, compared with $376-billion in Brazil and $172-billion in Mexico, it doesn't intervene in the foreign-exchange market to target a specific level for the rand. South African authorities don’t have the resources to influence the currency, Finance Minister Pravin Gordhan said in an interview on October 7 .
"Although it’s nothing new that South Africa needs more reserves, those comments limit the potential for massive rand gains," Ion de Vleeschauwer, chief dealer at Bidvest Bank, said. "It's not a rand-positive comment."
The bank's mandate is explicitly price stability, though it considers a number of other factors, including economic growth, Marcus said. Monetary policy is accommodative with negative real interest rates, the Reserve Bank said in a written presentation to lawmakers.
The central bank has held its benchmark interest rate at 5% since July 2012 even as inflation exceeded its 3% to 6% target band.
The central bank is concerned about the risks to inflation, of which the rand is the biggest, Brian Kahn, member of the Monetary Policy Committee and adviser to Marcus, told lawmakers.
"Potential for further monetary accommodation is limited due to inflationary pressures,” he said. "The dilemma facing monetary policy does continue. We have a fragile growth environment but upside risks to the inflation outlook."
The Reserve Bank forecast the South African economy will expand at about 2% this year, which is "not very good," Kahn said. "We really need around 5% growth to make significant inroads into unemployment."
Strikes in the third quarter in the car and component maker industries will have had a negative impact on growth, Kahn said.
"The third-quarter outlook is not very good," he said. The outlook for the mining industry "is not positive given the work stoppages that we have seen". – Bloomberg