South Africa’s oversold forward book was eliminated on February 18, South African Reserve Bank (SARB) Governor Tito Mboweni announced on Monday.
He said the squaring-off of the forward book represents a “significant milestone” that has allowed the country to deal finally and successfully with one of the sad consequences of an unfortunate part of South Africa’s history.
In future, purchase of foreign exchange going forward will generally be reflected in increasing gross reserves, he added.
Mboweni said the SARB had continuously reviewed its strategy to close out the forward book and withdraw from the forward market by way of transferring this activity to the private sector. Having made considerable progress in this regard, the use of the forward book for foreign exchange intervention purposes in 1998 represented the last major setback, which resulted in the forward book increasing from $11,9-billion in February 1996 to $25,3-billion in September 1998.
“Given that the losses incurred on the forward book were for the account of the government, the forward book was a huge structural burden on the fiscus and resulted in enormous costs to the fiscus over the years,” Mboweni said.
“Since October 1998,” he added, “the bank has not used the forward book to finance intervention to support the exchange rate of the rand. This policy change was partly necessitated by the costs of pursuing such a policy and partly by the ineffectiveness of such intervention strategies on their own. Moreover, the government introduced a formal inflation-targeting monetary policy framework in February 2000.
“The SARB has, however, used opportunities that presented themselves to purchase foreign exchange from the market to reduce the forward book, which represented an important source of external vulnerability, which had drawn negative comments from the IMF [International Monetary Fund], rating agencies and financial market participants, and which, among others, affected South Africa’s borrowing costs and rating prospects.
“That is, foreign exchange purchased in the spot market was swapped out, ie sold spot and bought forward, thereby reducing the oversold balance on the forward book.
“In the most recent period, not only has the bank purchased foreign exchange proceeds emanating from foreign currency denominated privatisation proceeds and government offshore borrowing, it has also used a ‘creaming-off’ strategy to purchase foreign exchange to achieve its goal of reducing the oversold forward book and ultimately to increase its level of foreign exchange reserves.
“At the end of the SARB’s last financial year, March 2003, the oversold forward book amounted to $6,6-billion. During the most recent period the main factors contributing to the reduction of the oversold forward book and its eventual elimination were foreign exchange purchases from the market and proceeds of the government’s external borrowing programme, which resulted in the bank being able to purchase proceeds of a Eurobond issue of €1.25-billion in May 2003 (dealing in the process also with the negative NOFP).
“I am truly delighted to announce to you today,” Mboweni stated, “that the oversold forward book was closed out during February 2004.
“Squaring-off the forward book indeed represents a significant milestone and has allowed us to finally successfully deal with one of the sad consequences of an unfortunate part of this country’s history. Purchases of foreign exchange going forward will now generally be reflected in increasing gross reserves. An old chapter has closed. A new chapter of building our reserves as a country has started,” he added. — I-Net Bridge