SA’s Gross Reserves Stable, Boosted By A Rise In Foreign Exchange

8 July 2021 – South Africa’s liquidity position remained stable in June as the country’s gross reserves increased marginally, though gold reserves slipped.

The SA Reserve Bank (SARB) said yesterday that the country’s gross reserves ticked up 0.6 percent to $54.47 billion (about R778bn) in June, from $51.14bn in May.

SARB said the gross reserves were boosted by a rise in foreign exchange reserves from $43.88bn to $44.82bn due to proceeds received from foreign borrowings from the New Development Bank.

In mid-June, the government received its $1bn economic recovery loan from the New Development Bank to support economic growth through employment generation.

At the same time, the forward position declined due to foreign exchange swops conducted for sterilisation and liquidity management purposes.

Investec economist Kamilla Kaplan said South Africa’s foreign reserves would continue to strengthen in the medium-term. Kaplan said the International Monetary Fund (IMF) may allow South Africa further allocation in its special drawing rights.

“In the coming months, it is probable that South Africa’s foreign exchange holdings will be further boosted by around $4bn,” Kaplan said. “This would be a result of the IMF issuing a $650bn general allocation of special drawing rights to IMF member countries in a bid to supplement reserves.”

South Africa’s foreign exchange reserves outweighed the impact of the decline in gold reserves.

Gold reserves declined by 7.6 percent in June, because of valuation adjustments, which reflected the decline in the market gold price.

Economists said investors were adjusting positions on heightened speculation that the US Federal Reserve would begin tapering its bond-buying programme sooner than expected as US inflation continued to rise.

This reduced the demand for gold and subsequently the price of the non-yielding commodity declined in spite of gold remaining a preferred safe-haven asset.

Nedbank’s senior economist Nicky Weimar said the SARB would maintain the current level of reserves.

Weimar said South Africa’s market conditions were generally favourable, and relatively attractive interest rates will continue to draw capital flows into the local market.

She said this would help contain the impact of capital flight to other secured assets of higher value, such as US bonds, in the short term.

“However, domestic economic conditions remain fragile due to the slow vaccine rollout, the outbreak of the highly contagious Delta variant, and renewed power supply cuts, which will undermine the local growth momentum,” Weimar said.

“The pace of financial inflows into the local market will also partly be undermined by the fiscal challenges – which could trigger further sovereign rating downgrades.” Source (Business Report)