Cape Town - Government will continue to assist the Reserve Bank to accumulate foreign exchange reserves and engage in foreign currency swaps to moderate the effect of capital inflows on the exchange rate, the Minister of Finance Pravin Gordhan revealed today.
Gordhan said in his Budget Speech, the Rand last year appreciated by 12% against a trade-weighted basket of currencies.
From December last year, to halfway through this month, the rand depreciated by about 10%.
The Reserve Bank spent R53 billion on foreign exchange reserve accumulation in 2010 - about 2% of GDP.
South Africa's foreign exchange reserves last year increased by US$5.8 billion to US$45.5 billion.
Between last month and August last year, the Reserve Bank entered into long-term currency swaps worth US$4.3 billion, to sterilise foreign currency flows.
While capital inflows to developing countries are expected to continue over the long term, they will remain "inherently volatile," said Gordhan.
Net private inflows to emerging markets increased to US$908 billion last year from US$581 billion in 2009.
The Rand was not alone in its strong appreciation last year - strong capital flows during 2010 led to significant appreciation of several emerging currencies, such as the Brazilian Real, the
Indonesian Rupee and the South Korean Won.
Gordhan said the capital inflow management problem was largely confined to a subset of emerging market economies, namely: Brazil, China, India, Indonesia, Malaysia, Mexico, South Africa and Turkey, which received 95 percent of portfolio equity flows to emerging countries last year.
He said last year the accumulation of reserves was the tool widely used to manage capital inflows.
Gordhan said the Institute for International Finance expects these inflows to remain high during this year.
While high capital inflows can help finance domestic investment, they represent a risk as they can contribute to overvalued currencies and create domestic asset bubbles.
Gordhan said the IMF is promoting international "rules of the road" to manage capital flows and forestall the rush to protectionism or competitive devaluations.
