Mariam Isa
8 October 2008
Johannesburg — But SA's import cover is down to 17 weeks from 20 weeks earlier in the year, and 26 weeks is desirable
SA's gold and foreign exchange reserves crept up last month after a steep plunge in August, but the rise was driven by a 6,5% increase in the gold price, data from the Reserve Bank showed yesterday.
Gross reserves rose 0,3% to $34,4bn, after declining nearly 2% in August in response to the rand's weaker exchange rate and lower gold prices. Net reserves, which exclude foreign loans, rose 0,4% to $33,638bn.
But the foreign exchange component fell for the second month in a row, suggesting the Bank will find it hard to build its reserves at a steady pace in the near term, after the rand's latest plunge.
"Global uncertainty could persist for a few more months, suggesting that the rand is likely to remain under pressure," said Nedbank economist Isaac Matshego. "This will inhibit the Reserve Bank's ability to accumulate reserves at a rapid pace."
Imports are rising as an official infrastructure spending programme gathers momentum.
That has reduced the volume of imports which SA's reserves can cover, to about 17 weeks from 20 weeks earlier this year, which is worrying as six months of import cover is seen as appropriate for an emerging economy like SA.
Reserves have climbed 39% in the past two years, a trend which supports SA's ability to repay debt and helps shield the economy from global shocks. But they still lag behind similar countries -- Nigeria has reserves of $60,8bn while Turkey has $76,2bn.
At the Bank's annual general meeting last month, governor Tito Mboweni said the Bank "does not regard the current level of reserves as excessive" and would continue to accumulate them at a "moderate pace" when market conditions permitted. The Bank has repeatedly said it will not buy foreign exchange in a manner likely to affect the value of the volatile rand, which dived to a six-year low near R9/$1 earlier this week. But analysts said the Bank generally stepped into the market when the rand firmed to below R7,50/$1.
The unit has clawed back some of its losses to trade at R8,86/$1 yesterday, but is still much weaker than the previous month. The Bank said the rand's exchange rate depreciated to R8,27/$1 last month from R7,70/$1 during August.
Nonetheless, analysts said the data showed that the Bank had still managed to buy some foreign exchange last month, with estimates ranging up to $300m.
But the foreign exchange component fell by about $137m -- which was attributed to a gain in the value of the dollar versus the euro, which is seen to account for about 20% of the Bank's reserves.
During the month, the European currency fell to $1,4290/€ 1 from $1,4737/€ 1 in August, the Bank said.
"We expect little accumulation (of reserves) during this prolonged period of turmoil," Absa Capital economist Monale Ratsoma said.
Further depreciation in the rand could prompt calls for the Bank to sell its reserves in a bid to prop up the currency, but the Bank was unlikely to respond, he said. Other analysts agreed.
"We would emphasise that the Bank is highly unlikely to sell foreign exchange to the market to prop up the rand during such periods of stress," said Goldman Sachs economist Ashok Bhundia.
Such intervention had failed in 1996 and 1998 and created a large exposure in the forward market for currency which took years to unwind, he said.
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