Adding his voice to the chorus of economists and business people calling for more intervention by the South African Reserve Bank (SARB), Brait economist Colen Garrow has said that the SARB should absorb more dollars to boost its reserves.
Garrow pointed out that amid the host of local economic data scheduled for release this week, it has almost gone unnoticed that progress on the net open foreign currency position (NOFP), which is the SARB’s forward book minus net foreign reserves, for October will also be unveiled on Friday.
“The NOFP data is important as it is likely to indicate the pace at which the SARB is intercepting dollars from the open market to wind down the oversold forward book it manages on behalf of the National Treasury,” Garrow said.
Garrow estimated that the SARB has upped its intervention from an estimated $25-million a day (approximately $500-million a month) to $30-million to $35-million a day (approximately $600-million a month) without any adverse effect on the rand.
The rand has continued to strengthen from a monthly average of R7,32 per dollar in September 2003 to a best level on November 24 of R6,49.
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 US dollar in September 2003 to below 108 yen on November 19.
Moody’s Investors Service head of sovereign ratings Kristin Lindow said last week that South Africa needed rand stability to grow faster.
One of the ways that the SARB can aid rand stability is to buy more dollars to boost its foreign reserves, which were only $7Â 839-billion at the end of September 2003 compared with $7Â 825-billion at the end of May 2003.
As imports were $3Â 087-billion in September, the official reserves only covered about two-and-a-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 $18Â 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 not a prescription for the SARB. She also clarified that when she was talking about rand stability, she meant the real effective exchange rate.
Garrow said the SARB had been very skilful in refocusing market attention away from the larger forward book to the smaller NOFP.
“This provided an environment in which market participants marked the currency more favourably from a risk perspective,” Garrow said.
Garrow said the SARB’s cautious stance on absorbing dollar inflows could possibly also be ascribed to concerns it previously had that any absorption of hard currency associated with non-resident portfolio flows may at a later stage have to be matched when speculators turned their positions around.
“The SARB has previously said that it would not defend the rand against foreign currency speculators, and squander reserves. Without this stance, the SARB may have had a haphazard approach to managing reserves. Instead, it has
proactively reduced a structural impediment to the point where it no longer poses a threat to financial markets.
“This has, however, meant that headline gold and foreign exchange reserves have remained virtually static — in dollars — as the bank focused instead on reducing the forward book.
“It is estimated that the forward book may be around $3-billion, a far cry from the $25-billion it reached at the height of the emerging market turmoil in 1998. The data on Friday will show what the SARB did during last month,” Garrow concluded.
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