Dollar-gold price hits forex reserves

SA’s gold and foreign reserves fell in January due mainly to the decline in the US dollar-gold price, valuation adjustments due to the appreciation of the US dollar as well as foreign exchange payments made on behalf of government, Reserve Bank data released on Wednesday shows.

Finance minister Enoch Godongwana is to present the 2024 budget on February 21 against the backdrop of a challenging growth outlook and growing demands for increased spending.

Godongwana and the National Treasury are expected to say something about tapping into a portion of the R500bn surplus in the Gold and Foreign Exchange Contingency Reserve Account (GFECRA) to finance part of the deficit/borrowing requirement.

Absa senior economist Miyelani Maluleke said SA does not have a history of sudden expenditure increases ahead of elections.

“Therefore, despite the upcoming elections, we have not pencilled into our baseline any new major spending allocations,” Maluleke said.

Given that the budget comes ahead of the elections, he said, one of the big questions is whether the government announces a burst of spending on areas such as free higher education or a basic income grant.

Bank data released on Wednesday shows the country’s foreign reserves have been under pressure.

SA’s gross foreign exchange reserves fell to $61.18bn in January, down from a record high of $62.518bn in the previous month. Decreases were observed in foreign currency reserves to $46.729bn in January compared to $47.882bn in December.

Gold and foreign-exchange reserves help buffer the balance of payments and maintain the confidence of financial markets. Foreign-exchange reserves are used to back foreign currency liabilities.

They are held by a country’s monetary authority (in gold and foreign currencies) to buffer the balance of payments and are primarily available to balance payments and maintain confidence in financial markets.

Wednesday’s data gives insight into the changes in these funds as well as the drivers .

’According to RMB analysts SAs reserves are one of the last lines of defence we have in the event of a sudden stop, but they also give indications of the Reserve Bank’s activity in financial markets.

“In the normal course of business, the central bank accumulates reserves, but large movements could suggest more significant Bank involvement although this type of involvement is generally reserved for periods of distress,” said RMB.

The statement provides detail of the US dollar equivalent of the level of the Bank’s official gold and foreign exchange reserves, Special Drawing Rights (SDRs), and foreign currency deposits received from customers.

Bank data shows gold reserves dropped to $8.22bn compared with $8.33bn previously.

SDR, which refer to an international type of monetary reserve currency created by the IMF also fell to $6.24bn from $6.29bn.

Meanwhile, the forward position, representing the central bank’s unsettled or swap transactions, rose slightly to $0.51bn.

FNB chief economist Mamello Matikinca-Ngwenya said that a country’s gross foreign reserves play a crucial role in maintaining import cover.

“At the end of the third quarter of 2023, the level of import cover, representing the value of gross foreign reserves relative to the value of merchandise imports, services, and income payments, increased to 5.5 months from 5.2 months,” Matikinca-Ngwenya said.

“However, SA’s import cover, even at these improved levels, remains below the estimated global average of 9.0 months at the end of 2022 and the average of 10.6 months for Brazil, Russia, India, and China.”

The data also comes amid calls by civil organisations and some in the market for the Treasury to use the unrealised profits on SA’s gold and foreignexchange reserves, housed in the GFECRA to alleviate its fiscal challenges.

The Treasury has since begun working with the Reserve Bank on the reserve account for a way forward.