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Economics Division

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.

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Economics Division

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  1. Reducing economic risk: a case for closing the NOFP Parliament briefing Goolam Ballim Economics Division

  2. 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

  3. 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

  4. US$ billion, as at 13 June 2001 Gross forward book 10.3 lessNet spot gold & forex reserves 5.0 equalsNet Open Forward Position 5.3 Gross gold & forex reserves 7.6 lessForeign credit lines 2.6 equalsNet spot gold & forex reserves 5.0 The forward book defined • Shifting exchange rate risk from the private sector onto the taxpayer

  5. US$ million Gross forward book NOFP $10.3bn $5.0bn Net spot gold and forex reserves $5.3bn 94 95 96 97 98 99 00 01 Source: SARB NOFP of the SARB • Shifting exchange rate risk from the private sector onto the taxpayer

  6. 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

  7. US$ million Rand/US$ Net portfolio investment - R million R/$ (rhs) NOFP 1998 1999 2000 2001 Source: SARB Impact of investment flows on reserves and the NOFP • Shifting exchange rate risk from the private sector onto the taxpayer

  8. US$ million Rand/US$ Net portfolio investment - R million R/$ (rhs) NOFP 1998 1999 2000 2001 Source: SARB Impact of investment flows on reserves and the NOFP • Shifting exchange rate risk from the private sector onto the taxpayer

  9. US$ million Rand/US$ Net portfolio investment - R million R/$ (rhs) NOFP 1998 1999 2000 2001 Source: SARB Impact of investment flows on reserves and the NOFP • Shifting exchange rate risk from the private sector onto the taxpayer

  10. US$ million Rand/US$ Net portfolio investment - R million R/$ rhs) NOFP 1998 1999 2000 2001 Source: SARB Impact of investment flows on reserves and the NOFP • Shifting exchange rate risk from the private sector onto the taxpayer

  11. US$ million Rand/US$ Net portfolio investment - R million R/$ rhs) NOFP 1998 1999 2000 2001 Source: SARB Impact of investment flows on reserves and the NOFP • Shifting exchange rate risk from the private sector onto the taxpayer

  12. Costs of SARB participation in the forex market • Ultimately, it leads to lower economic growth • Fiscal losses

  13. Spot and forward exchange rates, Rand/US$ Spot rate Profits on forward contracts 6-month forward, lagged 6 months Losses on forward contracts 1996 1997 1998 1999 2000 2001 Source: Standard Bank, Ecoserve Costs of SARB participation in the forex market • Ultimately, it leads to lower economic growth

  14. Profits and losses on forward contracts 1996 1997 1998 1999 2000 2001 Source: SARB, Standard Bank • Ultimately, it leads to lower economic growth

  15. 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

  16. 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

  17. Mechanisms for unwinding the NOFP • Timing is critical • Offshore bond issues • State asset restructuring

  18. Final remarks • Governments contribute to economic growth by reducing prices and uncertainty • NOFP closure is part of this process

  19. The end www.ed.standardbank.co.za Economics Division

  20. Public debt in emerging economies • Two variables are critical: 1) the mix of instruments 2) timing

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