The South African Reserve Bank (SARB) publishes data on its holdings of foreign exchange, gold and IMF Special Drawing Rights on a monthly basis. A lot of the focus is on net foreign reserves, which SARB data on Monday 7 October 2019 showed fell in September to $44.058-billion from $44.226-billion. This is hardly front-page news.

But gross reserves surged by almost $5-billion to $54.9-billion, a record high, which at first glance is a rare piece of good economic news. (The difference between the two is technical, reflecting the bank’s forward position and change in foreign currency deposits received). This largely stemmed from the proceeds of the $5-billion worth of eurobonds which the Treasury recently issued on international markets.

This helps to provide an extra cushion against external shocks — something the economy can really use in these volatile times. Among other things, it raises South Africa’s import cover to 6.6 months. (Import cover measures the number of months of imports that can be covered with foreign exchange reserves available with the central bank of the country. Three months is regarded as the bare minimum, while eight to 10 months is regarded as adequate.)

When Pakistan went to the IMF for a bailout in July, its reserves were down to $7.3-billion, less than two months of import cover. Being able to comfortably pay for your import obligations is crucial, especially in an economy such as South Africa’s which is dependent among other things on oil imports to keep things running.

Broadly, this is also positive for the rand. Having said that, the Reserve Bank is not seen using its relatively cash-flush position to intervene forcefully in the markets to defend the currency. There are plenty of examples of why caution is wise in this regard, notably Argentina, which has been burning scarce reserves to defend its peso in a largely futile battle.

“The rise in gross reserves takes the import cover ratio to 6.6, and while this suggests that SA has buffers in the event of an external shock, the SARB is not expected to intervene in the forex market,” Kieran Siney, a financial market analyst at ETM Analytics, told Business Maverick.

“Moreover, it is important to be cognisant of how fragile SA is from a fiscal perspective and to take note that the eurobond issuance has seen SA’s vulnerability from a fiscal point of view to external shocks rise,” said Siney.

It would be better to build up reserves through other avenues such as foreign direct investment (FDI) inflows, which this economy desperately needs, given South Africa’s low savings rates.

FDI inflows would also be a key sign of confidence. The bond issuance was taken as a sign of confidence in the overall direction of macroeconomic policy, but it was also a sign that investors are hungry for yields at a time when much of the debt from the developed world has extremely low and even negative yields. BM