Y2K Liquidity Build-Up May Be Behind Gold Rise
Business Day (Johannesburg)
November 3, 1999
By Samantha Enslin
Johannesburg - A build-up in liquidity ahead of Y2K could be behind the unexpected rise in gross gold and foreign exchange reserves last month, economists said yesterday.
According to the Reserve Bank, preliminary gross gold and foreign exchange reserves increased to R42,6bn from R39,2bn in September, exceeding the Reuters consensus forecast of R40,4bn.
In dollar terms, October reserves stood at $6,9bn, up from $6,5bn the month before. Reserves now cover 14 weeks' worth of imports.
An increase in the Bank's revolving credit facility for the third consecutive month, now at R19,7bn, means the use of credit lines are now higher than during the height of the currency crisis last year.
The Bank was forced to draw excessively on foreign credit lines and increase the use of the forward book in an attempt to stave off an attack by currency speculators.
Noelani King, economist at PSG Investment Bank, said this time around the Bank was building up liquidity in its cash component to be able to respond to possible volatile market movements over the year-end.
"This is done to create a liquidity cushion in the event of a liquidity squeeze over Y2K and it is unlikely the Reserve Bank will use these reserves to protect the rand," she said.
Standard Bank economist Goolam Ballim said among the concerns around Y2K was that foreign portfolio investment in SA bonds and equities could lighten towards the end of the year, placing downward pressure on reserves.
Nico Czypionka, chief economist at SG Frankel Pollak, said it appeared as if foreign banks had adopted a "use it or lose it" attitude to some standby facilities, and the Reserve Bank decided to lock in liquidity timeously.
The net reserve position - which excludes the use of credit facilities - also improved, rising to R22,9bn from R21,5bn due to the effect of a 2% depreciation in the rand-dollar exchange rate.
Economists were encouraged by a continued decline in the net open foreign currency position - SA's uncovered exposure in the forward foreign exchange market - which stood at $14,9bn from R15,6bn. The forward book dropped to $18,7bn from $19,2bn.
Czypionka said this reduced exposure was crucial to SA's assessment by foreign analysts.
"To have reduced it so much since last year's peak must enhance our chances of a rerating to investment grade by Standard & Poor's." The build-up of now sizeable foreign currency balances offshore would assist the Bank ultimately to withdraw from the forward market all together, he said.
Economists agreed that an improvement in reserves supported a further easing of interest rates. But Johan Rossouw, economist at ABN Amro Securities, said other factors such as higher inflationary pressures, liquidity and other concerns relating to Y2K, should reduce the probability of a significant reduction in interest rates.
However, Rossouw still anticipates a 50-basis-point cut in the prime lending rate before the end of this month.
Ballim said that, coupled with disinvestment by offshore investors on Y2K concerns at the end of the year, a weaker gold price would negatively affect reserves and could negate the positive effects of currency revaluation.
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