S.Africa June reserves Drop, First Fall in 2 yrs

By Mariam Isa Posted 07 July 2006 @ 07:21 pm EET     Print     Reprint     E-Mail     Comments

JOHANNESBURG (Reuters) - South Africa's reserves fell for the first time in two years during June, as the value of their gold component fell and the central bank avoided large purchases of foreign exchange while markets were volatile.

Net reserves fell by $175 million to $20.185 billion during the month, the first decline since June 2004, central bank data showed. Gross reserves dropped by $150 million to $23.950 billion, the first fall in that measure since October 2003.

"The decrease in foreign reserves was mainly due to revaluation adjustments, im particular impacting on gold reserves, which declined by $200 million," the bank said in a statement on its Web site, www.reservebank.co.za.

During June the price of gold slumped by more than 7 percent, according to the central bank. It also highlighted the fact that global foreign exchange markets during the month were subject to less liquid and more volatile conditions.

The South African Reserve Bank has repeatedly said it will continue to build its reserves by buying foreign exchange when market conditions permit, but will do so cautiously to avoid affecting the value of the rand.

"It was to be expected, the central bank stayed out of the market while the currency was weakening and volatility was high," ETM markets analyst George Glynos said.

"I look at this positively in that it confirms the SARB's commitment to building reserves only when market conditions allow."

The rand firmed by four cents to 7.11/dollar after the figures were released, before retreating back to 7.15/dollar.

Central bank figures showed the currency depreciated by about 7 percent against the dollar during June, a period when the rand was undermined by falling prices for precious metals and a swing in global sentiment against emerging markets.

But a breakdown of the data showed the foreign exchange component of its reserves rose by about $50 million, showing the central bank had remained in the market.

"It's interesting that they increased their exchange reserves even at a time when the rand was under some pressure," said NKC Independent Economists Hugo Pienaar.

"But $50 million is a small amount which shows they were probably not in the market to defend the rand which is also no surprise..."

South Africa has been steadily building its arsenal of reserves since it brought a long-standing negative position into balance early in 2004 with the elimination of its loss-making forward foreign exchange book.

Since then reserves have climbed steadily, although they still tend to lag comparable emerging markets.