9 July 2009
editorial
Johannesburg — LATEST figures from the Reserve Bank on gold and foreign exchange reserves have caused confusion in the market because they seem to suggest that when it comes to the rand exchange rate, the Bank is talking one game, but playing another.
The figures showed SA's gross gold and foreign exchange reserves slipped by $82m to $35,7bn in June, after rising in May. Normally there might be nothing remarkable about that. The main reason for the decline was a lower gold price, which reduced the value of the gold component of the reserves by about 3%. So while the Bank could well have bought a couple of hundred million dollars' worth of foreign currency over the month, the decline in the value of its gold holdings served to offset that.
But if it was only a couple of hundred million, or less, then the Bank was hardly active in the forex market. And that's what has market players worried. The Bank normally buys dollars in the market when conditions permit, to build up SA's reserves. In a really active month it might buy 1bn . And though Reserve Bank governor Tito Mboweni and his team insist the Bank doesn't intervene in the foreign exchange market to influence the value of the rand, everyone knows it tends to go in when it feels the rand is getting too strong.
Or does it? This time, it seems the Bank went quiet just when Mboweni seemed most concerned about the rand's strength. When the rand broke through R8 to the dollar at the beginning of June, the governor hinted that the rand's strength might be "unwelcome". A couple of days later he said that though he's always believed the central bank should not intervene in the forex market, maybe there was, after all, a case for it to "lean against the wind" at times.
So, given the governor's apparent efforts to cap the rand's gains in June, the market certainly expected that this would be a month in which the Bank would be buying dollars avidly.
Clearly it was not. So perhaps the Bank was being inconsistent. But the far more intriguing possibility is that Mboweni was trying to talk the rand down precisely because the Bank couldn't do much dollar buying -- or didn't deem it wise.
As Mboweni has noted, buying dollars to boost reserves is expensive. It costs, as the dollars yield less interest than rands, so the Bank or Treasury has to carry that cost. But when the Bank buys dollars in the market, it also has to create rands to do that, and if those rands aren't removed from the market, or "sterilised", it can be inflationary.
Recently, the government's surplus cash balances, now totalling about R70bn, have been handed over to the Bank as "sterilisation deposits" to help with that problem. Now, however, the government doesn't have surplus cash and may even have to use up some of those deposits. So it is possible that the Bank and the Treasury are wary of putting too much more liquidity into the market, especially with inflation proving stickier than expected.
So the reserves figures may be telling the market to probe a bit deeper to find the real story.
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