Reserve Bank building reserves

Reserve Bank

Reserve Bank

Pretoria – The Reserve Bank will continue to build up South Africa’s level of reserves – which are low compared to the country’s peers – when market conditions are conducive, says Deputy Reserve Bank Governor Daniel Mminele.

“When looking at other emerging market countries or similarly rated countries, our reserves are still relatively low,” Mminele said on Thursday.

South Africa’s level of foreign exchange reserves exceeded the short term foreign exchange commitments of the country. These broadly satisfied commonly accepted reserve adequacy measures, said the deputy governor.

“The build-up of foreign exchange reserves will continue when market conditions are conducive, and taking into account a careful cost/benefit analysis,” he told the Institutional Investor, Africa Sovereign Funds Roundtable in Cape Town.

South Africa does not target a specific optimal level of reserves but it does look at various measures that inform what could be deemed as an acceptable level of reserves. It takes into account factors like the balance of payments position and debt dynamics.

Mminele said that a higher reserves cushion would not only make South Africa more resilient in crisis situations and in the wake of volatile capital inflows, but it would also help to increase policy flexibility.

“For example, if exchange rates are perceived to have deviated significantly from what is considered ‘fair value’ as suggested by macro-economic fundamentals. Following the financial crisis sound governance and oversight around the management and investment of foreign assets ‘has become a critical discussion point’ in central banks and governments globally,” said the deputy governor.

The crisis had made the investment of reserves a challenge.

“The low return environment has exacerbated the opportunity costs of holding reserves and induced a debate amongst central banks about ways of enhancing returns by moving higher on the risk-return frontier,” said Mminele.

The central bank earlier today announced that the value of gross reserves fell by $853 million to $50 374 million in February. –