Bloomberg News

South Africa May Use Foreign Reserves to Ease Market Stress

October 12, 2011

(Updates with finance minister comments in second paragraph, central bank governor’s comments starting in 11th.)

Oct. 12 (Bloomberg) -- South African Finance Minister Pravin Gordhan said the country may use its foreign-currency reserves to “ease temporary market stress” after the rand slumped the most in three years last month.

“Over the past few years South Africa’s gross foreign- exchange reserves have increased to a level that more than adequately covers our foreign obligations,” Gordhan said in a written reply to lawmakers in Cape Town, dated Sept. 9 and circulated today. The government will “consider all our options” if volatile market conditions warrant currency intervention, he said in an interview in Johannesburg today.

The central bank has boosted gross gold and foreign- currency reserves to $49.7 billion at the end of September, up from $34.4 billion two years earlier, to moderate gains in the rand and improve the competitiveness of exports. Concerns that the European debt crisis will stall the global economic recovery led investors to sell riskier, emerging market assets, causing the rand to drop 12 percent in the past three months.

“If necessary, some of these reserves could be used to ease temporary market stress in response to global market turmoil,” Gordhan said.

The currency of Africa’s biggest economy climbed as much as 1.9 percent to 7.7684 per dollar today and traded 1.6 percent higher at 7.7885 by 2:45 p.m. in Johannesburg, erasing an earlier decline. The rand has fallen 15 percent against the dollar this year, trimming its gains against the U.S. currency since the beginning of 2009 to 21 percent.

‘Perfect Opportunity’

“It makes sense for them to sell dollars in times of rand volatility,” Leon Myburgh, sub-Saharan Africa strategist for Citigroup Inc. in Johannesburg, said in an e-mailed response to questions today. “September was a perfect opportunity for them to sell dollars, and they did not, raising the question of how seriously they are considering this as a policy option.”

Gill Marcus, the governor of the central bank, said she didn’t think Gordhan’s comments signaled a shift in policy.

“The approach that we have, and consistently have had, as government and as the bank is that it is prudent to build reserves,” she told reporters in Cape Town today. “We still have a commitment to steadily build reserves as and when appropriate. We do not target a level. I can’t answer for what the minister said in Parliament.”

South Africa’s flexible exchange rate acts as a “shock- absorbing mechanism” in the event of capital outflows from the country, improving exporters’ competitiveness and narrowing the current-account deficit, Gordhan said.

Very Dangerous

“Our prudently managed fiscal and monetary policies, which aim to keep the country’s debt burden at a sustainable level and control inflation, are essential to support investor confidence and reduce the probability that capital outflows become destabilizing,” he said.

In a presentation to lawmakers, Marcus warned that the global economy was in a “very, very dangerous situation” and that South Africa needs to monitor the situation closely.

“GDP growth is slowing worldwide, with downward revisions all the time,” she said. “There is talk of recession. The current conditions are so severe that if this continues as it is, you still have an enormously difficult situation. Going into a recession would make it worse. We are now entering our fifth year of this global crisis. If you look at the severity of the moment, there are many more years to come before we are out of this.”

Marcus called on the Group of 20 nations to jointly solve Europe’s debt crisis.

“It’s not for us to plug gaps there. There has to be a coherent strategy, a coordinated approach,” she said. “The European Central Bank has really become the lender of last resort to countries and it’s propping up the entire European banking system.”

--With assistance from Robert Brand in Cape Town and Stephen Gunnion and Nasreen Seria in Johannesburg. Editors: Gordon Bell, Digby Lidstone

To contact the reporter on this story: Mike Cohen in Cape Town at mcohen21@bloomberg.net

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


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