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

                      US$ billion, as at 13 June 2001
– Shifting                        Gross forward book            10.3
  exchange rate
  risk from the            less   Net spot gold & forex reserves 5.0
  private sector           equals Net Open Forward Position      5.3
  onto the taxpayer


                                  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
                                                        Gross forward book
  exchange rate       25000
  risk from the
  private sector
                      20000
  onto the taxpayer

                      15000
                                                                  NOFP
                                                                                $10.3bn
                      10000
                                                                                $5.0bn
                                       Net spot gold and forex reserves
                                                                                $5.3bn
                      5000
                                94      95    96     97     98     99     00   01
                              Source: SARB
                         The forward book defined


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

                               US$ million                        Rand/US$
– Shifting            25000                                                   9
                                    Net portfolio
  exchange rate
                                    investment -                  R/$ (rhs)
  risk from the       15000                                                   8
                                      R million
  private sector
  onto the taxpayer
                       5000                                                   7


                       -5000                                                  6

                                                    NOFP
                      -15000                                                  5


                      -25000                                                  4
                                   1998        1999        2000     2001
                               Source: SARB
                                Impact of investment flows on
                                       reserves and the NOFP

                               US$ million                        Rand/US$
– Shifting            25000                                                   9
                                    Net portfolio
  exchange rate
                                    investment -                  R/$ (rhs)
  risk from the       15000                                                   8
                                      R million
  private sector
  onto the taxpayer
                       5000                                                   7


                       -5000                                                  6

                                                    NOFP
                      -15000                                                  5


                      -25000                                                  4
                                   1998        1999        2000     2001
                               Source: SARB
                                Impact of investment flows on
                                       reserves and the NOFP

                               US$ million                        Rand/US$
– Shifting            25000                                                   9
                                    Net portfolio
  exchange rate
                                    investment -                  R/$ (rhs)
  risk from the       15000                                                   8
                                      R million
  private sector
  onto the taxpayer
                       5000                                                   7


                       -5000                                                  6

                                                    NOFP
                      -15000                                                  5


                      -25000                                                  4
                                   1998        1999        2000     2001
                               Source: SARB
                                Impact of investment flows on
                                       reserves and the NOFP

                               US$ million                        Rand/US$
– Shifting            25000                                                  9
                                    Net portfolio
  exchange rate
                                    investment -                  R/$ rhs)
  risk from the       15000                                                  8
                                      R million
  private sector
  onto the taxpayer
                       5000                                                  7


                       -5000                                                 6

                                                    NOFP
                      -15000                                                 5


                      -25000                                                 4
                                   1998        1999        2000     2001
                               Source: SARB
                                Impact of investment flows on
                                       reserves and the NOFP

                               US$ million                        Rand/US$
– Shifting            25000                                                  9
                                    Net portfolio
  exchange rate
                                    investment -                  R/$ rhs)
  risk from the       15000                                                  8
                                      R million
  private sector
  onto the taxpayer
                       5000                                                  7


                       -5000                                                 6

                                                    NOFP
                      -15000                                                 5


                      -25000                                                 4
                                   1998        1999        2000     2001
                               Source: SARB
                    Costs of SARB participation in the
                                 forex market
– Ultimately, it
  leads to lower     – Fiscal losses
  economic growth
                    Costs of SARB participation in the
                                            forex market
– Ultimately, it            Spot and forward exchange rates, Rand/US$
                        8
  leads to lower
  economic growth                                                    Spot rate
                        7      Profits on forward contracts

                        6

                        5                                             6-month forward,
                                                                      lagged 6 months
                        4
                                            Losses on forward contracts

                        3
                               1996       1997        1998    1999        2000   2001
                    Source: Standard Bank, Ecoserve
                        Profits and losses on forward
                                  contracts

– Ultimately, it
                              Rand/$ exchange rate - LHS
  leads to lower    8                                                              10000
  economic growth             Profits/losses on forward book - for
                    7         fiscal year ending 31 March - RHS                    5000

                    6                                                              0


                    5                                                              -5000

                    4                                                              -10000


                    3                                                              -15000
                             1996        1997         1998   1999    2000   2001
                        Source: SARB, Standard Bank
                    Costs of SARB participation in the
                                  forex market
– Ultimately, it
  leads to lower     – Fiscal losses
  economic growth    – 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          – The unknown quantity of future fiscal
  economic growth     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                            Total public debt        Percent of GDP          Percent of total
                                               Percent of GDP                                     public debt
  critical: 1) the    South Africa 1/                 45                       4.5                    10
  mix of              Argentina 2/                     43                      30                     68
                      Chile                            15                       4                     29
  instruments
                      Czech Republic                   13                       1                      9
  2) timing           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
                      1/ in 2001, 2/ in 2000, 3/ in 1998
                      Sources: IMF, International Financial Statistics; and Standard Bank estimates

				
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