South Africa needs rand stability to grow faster, Moody’s Investors Service head of sovereign ratings Kristin Lindow said on Thursday.
One of the ways that the South African Reserve Bank (SARB) can aid rand stability is to buy more dollars to boost its foreign reserves, which were only $7 839-billion at the end of September 2003 compared with $7 825-billion at the end of May 2003.
As imports were $3 087-billion in September, the official reserves only covered about two and half months of imports.
Most sovereign risk analysts recommend a minimum level of three months’ import coverage. In South Africa, commercial banks hold larger foreign reserves than the SARB, so if these are added, then South Africa’s total foreign reserves were $18 522-billion at the end of June 2003 or 18,5 weeks of imports.
“The SARB could test the market with additional dollar purchases and determine for themselves whether they were having an undesired effect on the exchange rate. In addition to providing stability to the rand, a reserve boost would also be good for its credit rating, as the lack of external liquidity is a major factor hampering an upgrade of South Africa’s foreign currency rating,” Lindow said.
Moody’s currently rates South Africa’s foreign currency obligations Baa2, a full three notches below its domestic currency ratings.
Lindow pointed out that her suggestion of dollar buying was a suggestion, not a prescription for the SARB. She also clarified that when she was talking about rand stability, she meant the real effective exchange rate.
Although the SARB bought more than $600-million-worth of “excess” dollars during September, the rand has continued to strengthen from a monthly average of R7,32 per dollar in September 2003 to a best level on November 19 of R6,52.
In this respect, the SARB is similar to the Bank of Japan, which has already bought 16,2-trillion yen worth of dollars this year or about $150-billion-worth of dollars, yet the yen strengthened from a monthly average of 117 in May 2003 to 115 yen per dollar in September 2003 and below 108 yen on November 19.
“Most Baa-rated countries have a short-term foreign obligation to official reserves ratio of around 75%, but for South Africa that is above 170%. If the denominator, that is official reserves, is increased, so that ratio will improve,” Lindow said.
In July 1998, the SARB said it would no longer intervene in the foreign exchange market after having spent more than $10-billion in only three months increasing its forward book obligations in a fruitless attempt to support the rand during the Asian crisis.
This changed at the time that Tito Mboweni became governor in August 1999, when the policy was changed to capturing long-term foreign currency inflows, which would be used to “expunge” the SARB’s net open forward position (NOFP), which is the SARB’s forward book minus net reserves.
The NOFP was subsequently declined from a peak of $23,2-billion in September 1998 to be “expunged” in May 2003 after the government received the proceeds of its eurobond.
In April 1998, the NOFP had been only $12 754-billion, which then increased to $17 878-billion in May 1998, $22 452-billion in June 1998 and $22 917-billion in July 1998.
At the March 20 2003 monetary policy committee meeting the SARB said “the bank has on occasions taken the opportunity to purchase dollars for our reserves on a moderate scale. Such operations purely represent normal prudent management of the Reserve Bank’s balance sheet, as is ordinarily the case in central banking. They are in no way directed at seeking to influence a particular level of the rand, whose value will continue to be set by the market.”
The rand on March 20 was trading at R8,15 per dollar.
Finance Minister Trevor Manuel has acknowledged the impact the stronger rand is having on growth by reducing the official gross domestic product growth forecast from 3,3% for this year at the time of the February 26 Budget to only 2,2% when he presented the medium-term Budget policy statement on November 12. — I-Net Bridge