The SARB’s Gold and Foreign Exchange Reserves Management Investment Policy governs the management of reserves. Reserves are managed within the SARB’s overall risk tolerance framework, and the related strategic benchmarks and targets are encapsulated in Strategic Asset Allocation. A three-tier governance structure clearly segregates the responsibilities for executive authority (Governors’ Executive Committee), strategic management (Reserves Management Committee) and portfolio management (Financial Markets Department). External fund managers manage a portion of the foreign exchange reserves to enhance the internal reserves management capabilities and diversify risk and return.
Management of gold reserves
The SARB has managed and held gold reserves since 1925 and purchased nearly all the locally produced gold. This involvement with gold has, of course, evolved. Currently, the SARB’s activities in gold are much more akin (by design) to those of other central banks.
Following the announcement by the Minister of Finance on 12 December 1997, South African gold producers could elect to sell all of their output themselves to approved counterparties. This dispensation was granted provided that the SARB (on behalf of the Minister of Finance) gave the necessary exemption from the provisions of the Exchange Control Regulations.
Official gold and foreign exchange reserves management investment policy
Investment objectives
Strategic asset allocation
External fund management
The evolution of reserves management
Governance
Foreign exchange operations
South Africa adheres to a floating exchange rate policy, where the nominal exchange rate is determined by market forces. However, the SARB is not indifferent to challenges posed by volatility and abrupt adjustments of the exchange rate
The Bank may get involved in the foreign exchange market to smooth out abrupt and severe adjustments of the exchange rate, to facilitate an orderly functioning of the foreign exchange market, as well as for financial stability reasons.
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In implementing its foreign exchange operations, the SARB mainly conducts spot purchases to accumulate reserves and to service clients’ foreign exchange needs, while foreign exchange swaps are used to manage domestic money market liquidity. Gold and foreign exchange reserves (customarily denominated in the major currencies) are the official public sector foreign assets that are readily available and typically held to:
service South Africa’s foreign exchange liabilities;maintain confidence in South Africa’s monetary, financial stability and exchange rate policies; andprotect the economic well-being of South Africa in the event of an external shock.
Maintaining an adequate level of reserves boosts investor confidence, thereby helping to reduce the likelihood of capital outflows.
Foreign exchange reserves are accumulated through open market purchases, when market conditions allow, that is, without unduly influencing the exchange rate or adding to volatility in the market. In exceptional circumstances, the SARB directly purchases a portion of foreign direct investment inflows, flows related to mergers and acquisitions, and proceeds from government foreign currency issues
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