Closing the NOFP: Reducing Economic Risk

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

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