WATCH: Drop in foreign currency deposits in September drags down SA’s liquidity
JOHANNESBURG – South Africa’s international liquidity fell by $168 million (R2.54 billion) in September due to a decline in foreign currency deposits.
The SA Reserve Bank (Sarb) said on Monday that the county’s net foreign reserves fell to $44.058bn in September from $44.226bn in August, reflecting a significant change in foreign currency deposits received and a decline in the forward position.
A stronger dollar weakened the value of foreign currency-denominated assets held by South Africa as it traded above R15 in September, and the gold price weakened by 2.87 percent.
However, this was offset by a hike in the official gold and foreign exchange reserves which increased from $49.948bn in August to $54.856bn in September. The Sarb said the proceeds from foreign debt issuance by the National Treasury and foreign exchange swops conducted for liquidity management purposes increased gross reserves.
Investec chief economist Annabel Bishop said the rand had largely ignored the report of a strengthening in the country’s foreign exchange and gold reserves as it weakened back to R15.18 to the dollar at the opening of market yesterday after closing strong last week at R15.03 to the dollar.
Bishop said the volatile domestic currency had weakened back towards the levels mainly prevailing last week over concerns of renewed global trade tensions.
“Typically, higher foreign exchange reserves are a positive factor under Moody’s rating assessments, but the international liquidity position declined at the same time,” Bishop said.
“While the drop in South Africa's international liquidity was relatively small at $168m, it is an overall negative outcome for South Africa.”
Bishop said the upcoming medium-term budget policy statement was being seen to cast a pall over the rand’s fortunes, as is a potential Moody’s country review with possibly rating action on South Africa's sovereign credit worthiness.
She said economists continue to expect only a downgrade to the rating outlook this year, or in the first half of 2020.
Bishop said perceptions that the ANC and its alliance partners continue to fight and were unable to embrace the pro-market reforms in the Treasury’s growth plan were unfortunate.
“However, with not enough done so far to create a sea change in the risk-reward metric for South Africa as an investment destination, the rand sees little domestic-led impetus to strengthen, continuing to follow global events,” she said.
“Tangible evidence of a marked reduction in risk for fixed investment in South Africa, and/or a significant rise in reward, preferably happening simultaneously, and without deterioration in the other, is required to spark robust economic growth in South Africa from a domestic private sector investment perspective.”
The appetite for South African equities has been hurt by concerns about global growth, the US-China trade war and a weak domestic growth.
Andre Botha, senior dealer at TreasuryONE, said the rand opened weaker after China put a dampener on the trade talks this week by stating that it would not be looking for a broad trade deal and would be keeping certain issues off the table.
Government successfully placed $5bn in bonds maturing in 2029 and 2049 in international capital markets in September.
NKC Research analyst Elize Kruger said the government stated at the time that the success of the transaction, believed to be the largest out of sub-Saharan Africa, was an expression of investor confidence in the country's sound macroeconomic policy framework and prudent fiscal management.
“Forex reserves remain an important indicator of a country's ability to repay foreign debt in the short term and maintain liquidity; it affects investor confidence and could also be used for currency defence,” Kruger said.
The rand weakened 0.59 percent by close of market to R15.14 to the dollar.