South African reserves and their role as the country’s financial buffer
Although the South African Reserve Bank has indicated during past bouts of the rand’s depreciation that it would not intervene by using the country’s reserves, South Africa’s reserves, which include gold and other foreign reserves, are an important liquidity buffer that can be used against foreign exchange and external funding pressures. According to the Bank for International Settlements (BIS), due to South Africa’s floating exchange regime, the country’s accumulation of foreign exchange reserves has not been primarily driven by the need to create capacity to intervene in the foreign exchange market. The Reserve Bank’s holding of reserves is, therefore, underpinned by precautionary considerations. South Africa’s foreign reserves currency composition is hence guided by relevant external liquidity considerations including the currency composition of the country’s exports as well as foreign currency denomination of government debt. Additionally, as South Africa has a relatively large and developed financial sector, its holding of foreign exchange reserves can also be utilized to overcome potential private sector foreign exchange shortages.
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