Download Rand/US$ Shifting exchange rate risk from the private sector onto

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
30000
– Shifting
exchange rate
risk from the
private sector
onto the taxpayer
Gross forward book
25000
20000
15000
NOFP
$10.3bn
10000
$5.0bn
Net spot gold and forex reserves
$5.3bn
5000
94
95
Source: SARB
96
97
98
99
00
01
The forward book defined
– Shifting
exchange rate
risk from the
private sector
onto the taxpayer
– A mechanism to insure private sector
foreign exchange risk
– The NOFP reflects the SARB’s shortage of
foreign exchange
– In recent years, the NOFP has sea-sawed
at the pace of forex inflows and SARB
interventions
Impact of investment flows on
reserves and the NOFP
– Shifting
exchange rate
risk from the
private sector
onto the taxpayer
US$ million
Rand/US$
25000
15000
9
Net portfolio
investment R million
R/$ (rhs)
8
5000
7
-5000
6
NOFP
-15000
5
-25000
4
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$
25000
15000
9
Net portfolio
investment R million
R/$ (rhs)
8
5000
7
-5000
6
NOFP
-15000
5
-25000
4
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$
25000
15000
9
Net portfolio
investment R million
R/$ (rhs)
8
5000
7
-5000
6
NOFP
-15000
5
-25000
4
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$
25000
15000
9
Net portfolio
investment R million
R/$ rhs)
8
5000
7
-5000
6
NOFP
-15000
5
-25000
4
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$
25000
15000
9
Net portfolio
investment R million
R/$ rhs)
8
5000
7
-5000
6
NOFP
-15000
5
-25000
4
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
8
7
Spot and forward exchange rates, Rand/US$
Spot rate
Profits on forward contracts
6
5
6-month forward,
lagged 6 months
4
Losses on forward contracts
3
1996
1997
Source: Standard Bank, Ecoserve
1998
1999
2000
2001
Profits and losses on forward
contracts
– Ultimately, it
leads to lower
economic growth
Rand/$ exchange rate - LHS
8
7
10000
Profits/losses on forward book - for
fiscal year ending 31 March - RHS
5000
6
0
5
-5000
4
-10000
3
-15000
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
Public debt in emerging
economies
Public foreign currency debt
– Two variables are
critical: 1) the
mix of
instruments
2) timing
Total public debt
Percent of GDP
45
Percent of GDP
4.5
Percent of total
public debt
10
Argentina 2/
43
30
68
Chile
15
4
29
Czech Republic
13
1
9
Hungary
57
8
14
Poland
43
23
54
Turkey
50
22
45
Korea 3/
15
5
36
Malaysia
37
6
16
Thailand
21
7
35
South Africa 1/
1/ in 2001, 2/ in 2000, 3/ in 1998
Sources: IMF, International Financial Statistics; and Standard Bank estimates