The South African Reserve Bank accumulated reserves over December, with its international liquidity position rising by $408-million to a new high of $11,4-billion, it announced on Friday.
Reacting to the central bank’s latest holdings, as on December 31 2004, Nedbank said there has been strong foreign interest in South African equities.
”Gross reserves rose to nearly $15-billion, which is equivalent to about three-and-a-half months of import cover,” Nedbank said in a statement.
Gold reserves declined during the month due to the lower gold price while gold holdings were slightly up.
The rand value of the reserves also rose but at a slower pace, due to the appreciation of the rand, which gained 2,8% against the dollar during December.
”Although South Africa’s yields remain attractive for now, rising United States interest rates are likely to narrow the gap and reduce the attractiveness of South African fixed-income securities to non-resident investors.
”This could lead to slower capital inflows in the short term.”
However, expected sovereign ratings upgrades and the more encouraging longer-term economic outlook should continue to provide support for capital inflows.
”As imports are rising rapidly, reserves in relations to import cover have remained static for several months despite a strong build-up in dollar reserves.
”This implies that more and more reserves are needed just to keep the ratio from falling. Reserves need to be at least double their current level to give any comfort from a liquidity point of view.”
Reserves accumulation is unlikely to influence the monetary policy stance. Instead, the Reserve Bank is likely to remain focused on the inflation outlook.
”While the short-term inflation outlook remains encouraging, the strong growth in credit poses dangers to longer-term price stability and therefore we feel that interest rates will be left unchanged in 2005,” Nedbank said. — Sapa