Reserve Bank governor Lesetja Kganyago has warned South Africans against seeing the gold & foreign exchange currency reserve account (GFECRA) — which now stands at nearly R500bn — as a “pot of gold” that would solve their economic woes.
But he added that the central bank was in talks with the National Treasury about possibly drawing from the GFECRA, which is split into three: the gold price adjustments account, the forward exchange account and the foreign exchange account.
“The issue is not that simple,” Kganyago told reporters after the monetary policy committee’s final meeting for the year.
“The notion that there is some pot of gold hidden in the Reserve Bank and that all that is needed is to figure out how to get into that pot of gold and, bingo, all of our problems are solved, is very, very simplistic and at worst is very reckless.”
At its meeting, the MPC kept the repo rate at 8.25%, with monetary policy remaining restrictive as a result of higher-than-expected inflation.
GFECRA profits or losses are unrealised because [they are] profits from the change in prices of assets… For you to realise the profits, you must sell the underlying assets
— Lesetja Kganyago
Finance minister Enoch Godongwana was quoted by Bloomberg at the time of the medium-term budget policy statement three weeks ago as saying the Treasury was considering ways of using the GFECRA money.
Kganyago said the Bank and Treasury officials were discussing the issue, but it was complex and the reserves fluctuated with movements in the market.
“Each one of those three accounts on any given year can make a loss or a profit,” he said.
“GFECRA profits or losses are unrealised because [they are] profits from the change in prices of assets… For you to realise the profits, you must sell the underlying assets… You either sell the gold or you sell the forex or you settle the swaps or forwards, and once you have done so, then you have the profits and you can have a discussion on what to do with the profits,” he said.
To realise profits entailed selling underlying assets. However, this could expose South Africa to risk around paying for imports and meeting its debt commitments.
“Somebody is going to say, ‘Will they [South Africa] be able to settle their foreign- currency-denominated debt? Will they be able to pay for imports? If they experience a massive capital outflow, will they be able to meet their obligations? I don’t think so. I am running for the hills,’” Kganyago said.
“And you might have a challenge with bonds and foreign exchange and so forth.”
Kganyago said the answer likely lay somewhere between risking assets and having them lie idle.
To release resources, the Bank could print money, but it would need to be recapitalised and that recapitalisation could only come from the taxpayer or the Treasury.
“The mechanisms that are going to have to be worked out would have to entail … the capital position of the Bank. We are engaged with the Treasury, we also have brought in international expertise to engage on this matter.”
He said while the GFECRA fund now stood at R497bn, it could fluctuate by as much as R20bn in a week, depending on the markets.
Asked if the Bank had reached the top of the interest rate cycle, Kganyago said the MPC would continue its inflation-targeting approach, taking only its policy and relevant data into account.
“This is the thing about being a central banker. There isn’t a shortage of advice and in South Africa, there are 60-million people out there with an idea of what they think we should do, and it is good for discourse. But at the end of the day, we have the statutory responsibility to tackle inflation and bring price stability and we’ve got to be seen to be acting in that manner.”
The operation of ports and rail, however, has become a serious constraint
— Lesetja Kganyago
He said imported goods inflation had risen and remained sensitive to rand weakness, while electricity prices and logistics constraints added to inflationary risks.
“While households and firms exhibit some resilience, economic growth has been volatile and highly sensitive to new shocks. A sustained reduction in load-shedding or greater energy supply from alternative sources would significantly increase growth. The operation of ports and rail, however, has become a serious constraint,” he said.
Raymond Parsons, an economist at North West University Business School, said interest rates would remain high but further hikes might not be necessary.
“This continued period of stability in interest rates since May remains a positive factor for business and consumer confidence at a time when borrowing costs are still at a 14-year high, having risen a cumulative 425 basis points since November 2021.”
He said while it was good news that the MPC raised its three-year growth forecasts, these were strongly predicated on load-shedding easing over time. The MPC raised its forecast for 2023 from 0.7% to 0.8% and predicted growth of 1.2% and 1.3% for 2024 and 2025.
“This again emphasises the extent to which business confidence and South Africa’s economic performance are largely dependent on the speedy implementation of structural economic reforms in the period ahead,” he said.
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