South African forex reserves are out of sync with rising external vulnerabilities

SOUTH AFRICA - Report 07 Jul 2023 by Iraj Abedian

Amidst elevated volatility, including a marked weakening of the rand over the past months, it is clear that the South African Reserve Bank still has no intention of intervening by using the country’s reserves, which include gold and other foreign reserves, as a buffer against foreign exchange pressures. The Reserve Bank’s holding of reserves is underpinned by precautionary considerations rather than the need to create capacity for intervening in the foreign exchange market largely due to its floating exchange regime.

According to the BIS , the primary reason for the South African Reserve Bank’s buildup of foreign exchange reserves has mainly been driven by the aim of self-insurance, with the acknowledgement of the importance of mitigating external vulnerabilities. The composition of South Africa's foreign reserves is influenced by external liquidity factors, taking into account the currency composition of the country's exports and the foreign currency denomination of government debt. Moreover, given South Africa's sizable and complex financial sector, its foreign exchange reserves can also serve as a means to address potential shortages of foreign currency in the private sector.

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