Ethel Hazelhurst
For the third year in a row, the Reserve Bank has reported financial losses flowing from large purchases of foreign exchange. Currency market intervention follows pressure – particularly from trade unions, exporters and politicians on the left – during periods of rand strength. The stronger domestic currency, while reducing inflation, makes local goods less competitive.
In the bank’s report on the 2011/12 financial year released yesterday, governor Gill Marcus said the bank and Treasury had bought about $4 billion (about R32bn) in foreign exchange in the year, to shore up foreign reserves and stabilise the currency market – in other words curb rand strength.
When the bank swops the local unit for hard currency, it has to mop up the extra rands in the market to avoid creating a money bubble that would boost inflation. And draining the liquidity is a costly business.
Marcus explained the bank lost out on these currency transactions in the year under review – as it did in previous years.
The bank absorbed the extra liquidity by issuing Reserve Bank debentures at 5.5 percent, while the “extremely low rates of return available on foreign exchange deposits” fell far short of this figure.
Some of the costs were delayed by swopping a portion of the purchases into the forward market, she said. But the mopping up operation contributed to the bank’s after-tax loss of R490.5 million in the financial year that ended in March.
The rand weakened over the course of the financial year from R6.73 to the dollar in April last year to R7.59 in March this year. The slide reduced the need for currency intervention so the latest loss compared favourably with the R1.2bn lost in the previous financial year.
Contributing to last year’s losses was the “significant actuarial loss incurred in meeting the staff post-employment medical benefit liability as at March 31”. Listed under operating costs for the year, the item was valued at R247.4m.
The quantum has been a problem for several years. The bank, like other companies, is faced with mounting costs of medical care combined with a bulge in the number of retirees because people live longer.
Marcus took a modest annual increase of 2.4 percent, which brought her package to just under R4.8m.
Summing up the financial year, Marcus said the period had generated many challenges for the bank. “The global environment continues to provide an uncertain, unstable and risky backdrop against which price and financial stability in the domestic economy have to be maintained.”
She noted: “The global financial crisis is now in its fifth year and there seems to be no end in sight.”
As governments have now almost exhausted their resources and therefore their ability to stimulate economic growth, there is pressure on central banks to increase their interventions. Marcus described the expectations as “in some instances unrealistic”.
At a time when “the banking system in advanced economies, particularly the euro zone, remains a cause for concern” the South African banking sector was generally sound, Marcus said.
“Banks remain well capitalised, and profitability in the sector increased gradually in 2011 and early 2012.
“Liquidity comfortably exceeded the current regulatory requirements and the credit risk of banks improved consistently as impaired advances in the sector declined.”
And she noted: “Banks also have limited exposure to financial institutions and products in countries that are a source of high levels of risk.”