One man who should be smug about the Treasury’s elimination of the Net Open Forward Position (NOFP) is Iraj Abedian, chief economist of the Standard Bank Group. Abedian called for the closing of the NOFP two years ago, arguing for a “big bang” approach.
It is finally happening after the successful â,¬1,2-billion bond issue two weeks ago, the latest in many endorsements of our economic management.
The NOFP records the Reserve Bank’s liabilities in the forward market for dollars. The forward contracts are concluded at a specific price — here the exchange rate. At delivery, the difference between the agreed and prevailing prices determines the gain or a loss.
Our NOFP has incurred heavy losses over two decades, with the last shock coming from the Asian financial crisis in 1998. At end-1998, the liability peaked at $23-billion.
The government then embarked on a steady elimination process that saw the liability stand at $9-billion in late 2000.
In early 2001 Abedian called for the elimination of the NOFP using a cold turkey approach. By merely stating an intention to close the forward book in, say, three months, he argued, short-term speculators would adjust their positions and reduce it by $3-billion. The government would then undertake a bond issue of a further $2,5-billion to $3-billion.
The difference would be settled by hard currency inflows, an option embraced by government in 2001. One of the biggest flows that year was from the delisting of De Beers.
A major reason for eliminating the position is that it creates scope for currency volatility. Abedian’s worst fears materialised in December 2001 when the currency shed 37% of its value.
Could we have avoided the crash if we had followed Abedian? “Maybe it wouldn’t have been so severe,” he said this week.
Does it matter how we got here or how long it took? “Not really,” Abedian said. “In the end, they raised $2,5-billion in bond issues, as we suggested.” The euro bond issue follows last May’s $1-billion issue in New York.
Where to from here? Abedian this week called for a build-up of reserves “gradually rather than rapidly, to avoid bringing instability to the currency”.
Reserves currently stand at $7-billion, about four times lower than that of comparable countries, Abedian says.
The best way to accumulate reserves is to use (often disappointing) proceeds from privatisation, through further bond issues — and by chasing the Holy Grail of foreign direct investment.
An acid test measure of adequacy of reserves is import cover — how long could we meet our import requirements without earning foreign exchange?
When the African National Congress came to power, the period stood at three weeks — now it’s close to 18. How far we’ve come!