SOUTH Africa’s foreign exchange liquidity could enter a slump in spite of gross reserves rising marginally in October as the US tapering threatens to put brakes on large capital inflows.
This could mean that finance minister Enoch Godongwana should carefully balance South Africa’s future spending priorities against declining reserves when he tables his maiden Medium-Term Budget Policy Statement (MTBPS) on Thursday.
The SA Reserve Bank (SARB) yesterday said foreign exchange reserves position rose by $46 million (R690m) , or 0.8 percent, to $57.52 billion, after declining by 1.35 percent in August.
The SARB said the international liquidity position also increased by $42m to $55.43bn.
The bank said the changes were mainly due to the increase in the US dollar gold price, the depreciation of US dollar against other currencies, and the matured swops conducted for sterilisation management purposes.
Gold reserves expanded by $25m to $7.21bn, reflecting an increase in the market gold price which continued to benefit from the commodity’s safe haven status as investors were speculating on the timing of the Federal Reserves’ asset tapering.
Nedbank senior economist Nicky Weimar said the SARB would maintain its holdings of reserves around current levels in the months ahead. Weimar said most of the changes in the level of reserves will reflect valuation adjustments. “While capital flows to South Africa will continue to benefit from the improvement in risk sentiment and relatively attractive interest rates, the reduction of quantitative easing by the US Federal Reserve will sustain volatility in emerging market assets and limit the amount of capital inflows,” Weimar said.
The rand depreciated by 0.3 percent against a firmer US dollar in October, while imports have increased over the past three months to September.
The SARB also said that the changes in the gross reserves were offset by foreign exchange payments made on behalf of the government, edging up slightly by 0.4 percent.
Investec economist Lara Hodes said the International Monetary Fund had previously advised that foreign exchange reserves should be accumulated when opportunities arise to strengthen the ability to deal with foreign exchange liquidity shocks.
Hodes concurred that South Africa’s external vulnerability, as a result, remained relatively elevated with rising levels of debt to gross domestic product (GDP).
“The MTBPS to be tabled on Thursday will likely reveal an improved set of fiscal metrics based on the revisions to GDP,” Hodes said.
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