South Africa net reserves fall nearly 2% to $33.5b

Johannesburg: South Africa's net gold and foreign exchange reserves fell 1.96 per cent to $33.5 billion in August on a sharp drop in the gold price and as the rand weakened against the dollar, central bank data showed on Friday.

Gross reserves declined to $34.332 billion from $35.004 billion in July, the bank said in a statement posted on its Web site.

The central bank has been steadily building up its reserves over the past four years to help cushion the country against external shocks, particularly as the current account deficit was 7.3 per cent of GDP in 2007.

But the decline last month, one of the biggest monthly falls in a decade, may suggest the bank did not want to buy dollars and thereby extend the rand's depreciation. The currency weakened to 7.7050 against the dollar at the end of August compared with 7.33 at end-July.

"They might have sent out the wrong signal if had been quite active in the open market, (signalling) that they were prepared to tolerate a weaker rand," Brait Merchant Bank economist Colen Garrow said. "That [further weakening the rand] would mean that they were not committed to fighting inflation."

Net foreign currency holdings decreased $336 million to $31.002 billion, while gold reserves dropped by the same amount to $3.33 billion due to a big fall in the price of the precious metal.

The gold price dived 9 per cent during the month to $832.90 an ounce.

The central bank brought a long-standing negative position in reserves into balance early in 2004 with the elimination of its loss-making forward foreign exchange book, historically the Achilles heel of the currency. While net reserves have risen significantly over the past four years, they still lag holdings in other emerging economies.