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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