Reducing economic risk a case for closing the

Reducing economic risk: a case for closing the NOFP Parliament briefing Goolam Ballim Economics Division

Presentation outline – An economic case for closing the NOFP – The forward book and the SARB’s role in the foreign exchange market – Costs of SARB participation in the forex market – Benefits of NOFP closure – Mechanisms for unwinding the NOFP – Final remarks

The forward book defined – Shifting exchange rate risk from the private sector onto the taxpayer – A mechanism to insure private sector foreign exchange risk – The NOFP reflects the SARB’s shortage of foreign exchange

The forward book defined US$ billion, as at 13 June 2001 – Shifting exchange rate risk from the private sector onto the taxpayer Gross forward book 10. 3 less Net spot gold & forex reserves 5. 0 equals Net Open Forward Position 5. 3 Gross gold & forex reserves 7. 6 less Foreign credit lines 2. 6 equals Net spot gold & forex reserves 5. 0

NOFP of the SARB US$ million – Shifting exchange rate risk from the private sector onto the taxpayer Gross forward book NOFP $10. 3 bn $5. 0 bn Net spot gold and forex reserves $5. 3 bn 94 95 Source: SARB 96 97 98 99 00 01

The forward book defined – Shifting exchange rate risk from the private sector onto the taxpayer – A mechanism to insure private sector foreign exchange risk – The NOFP reflects the SARB’s shortage of foreign exchange – In recent years, the NOFP has sea-sawed at the pace of forex inflows and SARB interventions

Impact of investment flows on reserves and the NOFP – Shifting exchange rate risk from the private sector onto the taxpayer US$ million Rand/US$ Net portfolio investment R million R/$ (rhs) NOFP 1998 Source: SARB 1999 2000 2001

Impact of investment flows on reserves and the NOFP – Shifting exchange rate risk from the private sector onto the taxpayer US$ million Rand/US$ Net portfolio investment R million R/$ (rhs) NOFP 1998 Source: SARB 1999 2000 2001

Impact of investment flows on reserves and the NOFP – Shifting exchange rate risk from the private sector onto the taxpayer US$ million Rand/US$ Net portfolio investment R million R/$ (rhs) NOFP 1998 Source: SARB 1999 2000 2001

Impact of investment flows on reserves and the NOFP – Shifting exchange rate risk from the private sector onto the taxpayer US$ million Rand/US$ Net portfolio investment R million R/$ rhs) NOFP 1998 Source: SARB 1999 2000 2001

Impact of investment flows on reserves and the NOFP – Shifting exchange rate risk from the private sector onto the taxpayer US$ million Rand/US$ Net portfolio investment R million R/$ rhs) NOFP 1998 Source: SARB 1999 2000 2001

Costs of SARB participation in the forex market – Ultimately, it leads to lower economic growth – Fiscal losses

Costs of SARB participation in the forex market – Ultimately, it leads to lower economic growth Spot and forward exchange rates, Rand/US$ Spot rate Profits on forward contracts 6 -month forward, lagged 6 months Losses on forward contracts 1996 1997 Source: Standard Bank, Ecoserve 1998 1999 2000 2001

Profits and losses on forward contracts – Ultimately, it leads to lower economic growth 1996 1997 Source: SARB, Standard Bank 1998 1999 2000 2001

Costs of SARB participation in the forex market – Ultimately, it leads to lower economic growth – Fiscal losses – Increased rand volatility – Lower domestic short- and long-term investment – Negative perception of national welfare – Delays in exports and in the repatriation of foreign earnings – Increased vulnerability to speculative pressure

Benefits of NOFP closure – Stronger economic growth – The unknown quantity of future fiscal losses is eliminated – – Improved investment climate Positive wealth/perception effect Reduced speculative risk Less incentive to delay repatriation of offshore earnings – More appropriate monetary policy

Mechanisms for unwinding the NOFP – Timing is critical – Offshore bond issues – State asset restructuring

Final remarks – Governments contribute to economic growth by reducing prices and uncertainty – NOFP closure is part of this process

The end www. ed. standardbank. co. za Economics Division

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