FORMER Reserve Bank Governor Tito Mboweni was often praised for improving transparency at the Reserve Bank. But one area where this is certainly not true, and where massive improvements are necessary, is disclosure on foreign exchange reserves.
These have been in the news lately because of calls for the bank to boost reserves by buying dollars and other currencies in the currency market.
This reflects concerns about the rand's relative strength. People worried about rand strength want the Reserve Bank to buy dollars, so that extra demand for dollars will cause that currency to strengthen against the rand.
Forex reserves are also important, because they serve as a buffer that can be used at times of crisis. The bigger the stash of forex reserves held by the Reserve Bank, the easier it will be able to provide dollars to the market should there be a shortage.
In effect, that means if there's ever a massive weakening in the rand sometime in the future, the Reserve Bank should be able to put a brake on the weakening.
But for the bank to do that, it needs a big stash of foreign currency. At almost $39bn, SA's forex reserve holdings have improved a lot. However, some commentators feel the bank should build a bigger cushion and use periods of rand strength to build reserves aggressively.
This would achieve a double whammy - prevent the rand from strengthening too much, as well as help build a buffer for when the tide turns and the rand is weakening too much.
It's clear there will be times that the bank will buy and times when it will sell foreign currency. Now is obviously a time to buy. So is the bank buying?
That's the million dollar question. Right now, it's a mystery. The Reserve Bank is as silent as the grave.
Market keen on clarification
This has created a whole lot of work and speculation for economists, who try to work out what the bank is doing in the market each month when it releases the figures.
The Reserve Bank releases the gold and foreign exchange reserves figures in dollar terms for the previous month's reserves on the seventh of each month.
The key point is that any change might not be the result of Reserve Bank actions in the market. An increase in the reserves can be the result of valuation factors - such as the fact that the bank keeps a lot of its forex reserves in euros, which have strengthened against the dollar.
Also, the gold price may have gone up in dollar terms. Adjusting for these valuation effects is, apart from the gold price, just guesswork, as only the Reserve Bank knows the composition of currencies in its reserves.
So why do economists care about the Reserve Bank's actions, or lack thereof, in the market?
The answer is simply that if the bank has been an active buyer of foreign exchange in the market, it's trying to stem the rand's appreciation. (The opposite is also true.) The market is very eager to know whether the Reserve Bank is acting to stop the rand from appreciating.
Mantle of mystery
The bank's buying of dollars might not be massive, but the very act of stepping into the market to buy forex shows that it wants a weaker rand. (Again, the opposite would also be true.)
When the latest figures on the Reserve Bank's gold and foreign exchange reserves were released on Friday, Rand Merchant Bank (RMB) said the bank had "finally shown its hand" by buying a "meaningful" $470m in the market last month.
"If our assessment is correct, it probably implies that they were in the market around the middle of the month when the rand traded briefly under R7.30," RMB said.
But Absa disagreed. It said: "There remains little evidence of significant intervention by the Reserve Bank in October, in our view, and we believe the Reserve Bank is unlikely to engage in significant accumulation activity in the medium term." Other banks didn't even try to take a view on whether the bank was active in the market or not.
A possible reason why the bank shrouds its activities in the forex market in such secrecy is that it doesn't want to be seen targeting a specific level of the rand, such as the R7.30 mentioned by RMB. But when he was governor, Mboweni and his officials openly agreed that the rand was too strong.
Finance Minister Pravin Gordhan made it even clearer that he thought the rand was too strong. So what would be the problem with the central bank coming right out and saying: "We bought $500m of forex last month"?
The bank's lack of transparency on such an important issue is unacceptable.
- Fin24.com