Marcus Says South Africa Needs Higher Reserves Amid Risks

South Africa needs to boost foreign-currency reserves to shield the economy against the risk of capital outflows, central bank Governor Gill Marcus said.

Reserves “are low by comparison with our emerging-market peers,” Marcus told lawmakers in Cape Town today. “The need to accumulate these reserves has been driven by the need to reduce our vulnerability to sudden large outflows of capital, something that is regarded as a real risk given the policy decisions likely to be taken by the Federal Reserve in near future.”

The rand has lost 15 percent against the dollar this year as the U.S. Federal Reserve contemplates reducing its $85 billion-a-month monetary stimulus program that’s helped to support global growth. The World Bank and International Monetary Fund warned this week that South Africa is vulnerable to the risk of capital outflows.

While the central bank has boosted gross reserves over the years to $50.02 billion in September, compared with $376 billion in Brazil and $172 billion in Mexico, it doesn’t intervene in the foreign-exchange market to target a specific level for the rand. South Africa doesn’t have the resources to influence the currency, Finance Minister Pravin Gordhan said in an Oct. 7 interview.

The rand fell as much as 0.2 percent against the dollar after Marcus spoke, erasing an earlier gain. It was trading at 9.9917 per dollar by 2:29 p.m. in Johannesburg, little changed from 9.9970 late yesterday.

‘Limit Potential’

“Although it’s nothing new that South Africa needs more reserves, those comments limit the potential for massive rand gains,” Ion de Vleeschauwer, chief dealer at Bidvest Bank, said by phone from Johannesburg. “It’s not a rand-positive comment.”

The central bank has held its benchmark interest rate at 5 percent since July 2012 even as inflation exceeded its 3 percent to 6 percent target band.

“We are not comfortable being outside the range at all, but given the dynamics we have got to take all other things into account,” Marcus told reporters. “It is about flexible inflation targeting. These are not normal times. You are dealing with a very uncertain global environment and very fragile and therefore perhaps we are more tolerant than we would be in other circumstances.”

Policy Dilemma

Brian Kahn, a member of the Monetary Policy Committee and adviser to Marcus, told lawmakers the rand constituted the biggest risk to the inflation outlook, while higher costs of labor, food and gasoline were also a concern.

“Potential for further monetary accommodation is limited due to inflationary pressures,” he said. “The dilemma facing monetary policy does continue. We have a fragile growth environment but upside risks to the inflation outlook.”

The Reserve Bank forecast the South African economy will expand at about 2 percent this year, which is “not very good,” Kahn said. “We really need around 5 percent growth to make significant inroads into unemployment,” he said.

Strikes in the third quarter in the car and component maker industries has curbed the growth outlook and increased pressure on the current-account deficit, which widened to 6.5 percent of gross domestic product in the second quarter from 5.8 percent in the previous three months.

“We have to finance that deficit and in the current environment that has become more difficult,” Kahn said. “Bond flows to emerging markets have become more fickle. We simply aren’t exporting enough. Not only are we exporting less in volume terms but the prices we are getting are moderating as well.”

Marcus said the government shutdown in the U.S. and an impasse over raising the debt ceiling was of “grave concern” and posed a threat to the entire global economy.

“What happens in the United States matters to all of us,” Marcus said. “ If you throw the United States into recession what do you do to the rest of the world which is so fragile?”

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