Bloomberg News

South African Central Bank Posts Loss in Bid to Curb Rand

June 14, 2011

(Updates with Marcus’s comments in fourth paragraph and dividends in last.)

June 14 (Bloomberg) -- South Africa’s central bank posted a loss for a second consecutive year as the cost of building foreign currency reserves to curb a stronger rand soared.

The loss widened to 1.17 billion rand ($172.9 million) in the financial year through March from 1.05 billion rand in the previous 12 months, the central bank said in its annual report, released in the capital, Pretoria, today.

The bank bought $10.3 billion of foreign currency in the year as near-zero interest rates in the U.S., Japan and the euro region fuelled demand for emerging-market assets such as South Africa, where the benchmark interest rate is 5.5 percent. Even with those purchases the rand gained 14 percent against the dollar and Reserve Bank Governor Gill Marcus and Finance Minister Pravin Gordhan described the currency as overvalued.

“We have been committed to continue to build reserves as and when appropriate,” Marcus told reporters in Pretoria today. “The fact that you incur losses isn’t something unimportant, but we can’t determine the decisions we make as a bank on whether we make profits or losses.”

The central bank issues domestic bonds to mop up excess liquidity resulting from selling rand for dollars in a process it refers to as “sterilization.” The bonds have a higher yield than the central bank receives on its investments in foreign reserves, creating a loss.

Not for Profit

“The Reserve Bank is not an organization that’s for profit,” Marcus said. “We take decisions in the country interest. The exchange rate is important in terms of its impact, but as I’ve said before, we don’t target a level of reserves or a level for the currency.”

The National Treasury increased its foreign currency deposits with the central bank by $5.3 billion last year to help the bank build reserves, the report shows. The Reserve Bank also bought $4 billion worth of foreign currency through longer-dated dollar swaps transactions.

The rand gained as much as 1 percent to 6.7311 against the dollar today and was trading at 6.7628 as of 4:55 p.m. in Johannesburg today.

The central bank paid dividends of 200,000 rand to shareholders in each of the two years it posted a loss as it was paid out of accumulated profits, Marcus said. The bank will evaluate that policy again this year, she said.

--Editors: Philip Sanders, Vernon Wessels

To contact the reporter responsible for this story: Nasreen Seria in Johannesburg at nseria@bloomberg.net.

To contact the editors responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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