Zafar Parker on 25 years of reserve management at the South African Reserve Bank

The editor spoke with the head of the financial markets department at the South African Reserve Bank on March 11, 2026.

What key changes in FX management – in terms of asset accumulation, liquidity and diversification – have taken place during your 25 years working in reserve management at the South African Reserve Bank?

Just over 30 years ago, the Sarb was addressing the remnants of an oversold foreign exchange forward position, a challenge that was ultimately resolved in early 2004. Following this resolution, the Sarb commenced a systematic accumulation of foreign exchange reserves by leveraging favourable market conditions to strategically rebuild its reserve holdings.

From the mid-2000s onward, South Africa’s gross foreign exchange reserves increased significantly, rising from around $20 billion to approximately $80 billion now. Throughout this period, reserve management has been guided by a strong emphasis on capital preservation and liquidity, with investments focused primarily on highly liquid instruments.

As reserves grew, diversification increased both across currencies and asset classes. Currency exposure, initially concentrated in major reserve currencies such as the US dollar and euro, was gradually broadened to include additional developed-market currencies and, over time, selected emerging-market currencies such as the Chinese renminbi. Asset-class diversification also expanded beyond government and supranational bonds to include a wider range of high-quality fixed income instruments.

How have the Sarb’s approaches to calculating the optimal size of its reserves, as well as the pros and cons of holding a large portfolio of FX reserves versus the opportunity cost – in terms of cost of carry, the money being put to productive use in an emerging economy – developed over your time at the bank?

The cost of holding foreign exchange reserves has consistently been an important consideration in the Sarb’s reserve accumulation strategy. As reserves increased over time, greater emphasis was placed on assessing reserve adequacy using a range of complementary frameworks, rather than relying on a single metric.

The Sarb has drawn on traditional indicators such as import cover and short-term external debt coverage, while also incorporating more comprehensive analytical frameworks aligned with international best practice, including the International Monetary Fund’s Assessing Reserve Adequacy approach. South Africa only achieved 100% adequacy for the IMF ARA metric in 2025.

As the level of reserves has grown, the Sarb has increasingly focused on understanding and managing these costs, including the funding and sterilisation costs associated with reserve accumulation, while recognising that adequate reserves can also contribute positively to sovereign risk perceptions and financial stability.

What considerations and/or activities does the Sarb undertake when it comes to trying to keep financing costs to a minimum for the government as a whole?

The Sarb does not have a mandate to manage or reduce government financing costs. Responsibility for fiscal policy and borrowing rests with the National Treasury [NT]. Considering the broad public-sector balance sheet, historically, the NT has made contributions to reserve accumulation by depositing balances with the Sarb to sterilise FX reserve purchases. But these were withdrawn between 2020 and 2023. Government is also the legal owner of the Gold and Foreign Exchange Contingency Reserve Account [GFECRA], which captures all valuation gains or losses on gold and FX reserves.

In recent years, the Sarb has built out a surplus system for monetary policy implementation, which has simplified sterilisation activities and reduced reliance on NT deposits. The Sarb and NT have also agreed on a new GFECRA settlement framework, which allows for some of these balances to be transferred to the government, to reduce borrowing. The Sarb and NT have built out a stress-testing framework to ensure a prudent buffer is maintained in the GFECRA account, with only excess balances being transferred to government.

How has the size of your liquidity tranche changed, given the key lessons you have learned related to FX interventions, debt coverage, sudden portfolio reversals and other requirements over the years?

The liquidity tranche has consistently remained a substantial component of South Africa’s foreign exchange reserves. Its primary purpose is to ensure that the country can meet external payment obligations and respond effectively to periods of market stress, including episodes of sudden stops.

While the absolute size of the liquidity tranche has increased alongside the growth in total reserves, its role has remained broadly unchanged. The emphasis has consistently been on holding high-quality, readily deployable assets that can be used without delay in periods of stress, rather than on maximising returns. Adjustments over time have therefore reflected changes in external risks and market conditions, rather than a fundamental shift in reserve management philosophy. It should be noted that we have not undertaken any FX interventions this century, other than to accumulate FX reserves.

The US dollar’s position in FX reserves held by central banks during the past quarter of a century has declined from around 70% to 57%, with the euro proportion remaining pretty similar. What is driving this change? And how does this factor into – if at all – the Sarb’s decision-making?

This change may have been due to the growth in global reserve holdings and a desire among reserve managers to diversify portfolios as balance sheets expand. While the US dollar remains dominant due to the depth and liquidity of US financial markets, the Sarb has focused on determining an appropriate currency composition based on South Africa’s own macroeconomic characteristics, trade patterns and financial exposures, rather than explicitly tracking global averages or peer benchmarks. Currently, our total gross reserves are roughly 50% dollars, one-quarter gold, just under 10% IMF special drawing rights [SDRs], and the rest split between other currencies, mainly euro, renminbi and sterling.

How would you assess the Sarb’s investments into non-SDR developed-country sovereign bonds? What about Asian currencies?

The Sarb’s reserve management framework places emphasis on diversification, liquidity and risk characteristics, rather than formal classification within the SDR basket. Investments in non-SDR developed-market sovereign bonds and selected Asian currencies have been assessed on the basis of macroeconomic fundamentals, market depth, liquidity and credit quality, consistent with our objectives of capital preservation and liquidity. Our most important investments in non-SDR currencies cover Australian dollars, Canadian dollars and Korean won.

How has management of your investment tranche developed over time? Has your philosophy and investment approach to move into ‘riskier’ asset classes – including mortgage-backed securities, corporate bonds and equities – changed over time?

As the size of the investment tranche increased, the Sarb broadened diversification across asset classes to improve risk-adjusted returns within a conservative framework. This resulted in a gradual expansion beyond government and supranational bonds to include additional high-quality fixed income instruments such as corporate bonds and securitised assets, reflecting portfolio size and maturity, rather than a fundamental shift in risk tolerance.

What active management strategies does the Sarb employ, and with what aim? How have these performed? Have you attempted to monetise bank deposits, SDR, gold and other assets to enhance yield? If so, what has worked well, and what would you avoid moving forwards?

The Sarb actively manages its fixed income portfolios with the objective of generating incremental returns relative to strategic benchmarks, while remaining within strict risk limits. SDR holdings have not been monetised for yield enhancement, and gold holdings are managed largely on a passive basis, reflecting their role as a long-term store of value, rather than a return-seeking asset.

The Sarb closed out its oversold forward position in 2003, and, 10 years later, bond futures trading was introduced to internally managed portfolios. What were lessons from this period, and how does the central bank use futures now?

The elimination of the oversold forward position reflected a broader policy decision on exchange rate management, while the later introduction of bond futures trading served a distinct purpose related to the active management of bond portfolios. Futures were initially traded in the internally managed portfolios, but are currently used only in externally managed portfolios.

Are there any other currencies or asset classes the Sarb has exposure to through external managers, and what are the percentage allocations?

More complex or specialised asset classes, such as certain securitised instruments, are typically managed through external managers with appropriate expertise. The proportion of externally managed assets varies over time, but most of the reserve assets continue to be managed internally, in line with the Sarb’s governance and risk management framework.

How has your approach to risk management developed over time? What approaches – minimum loss, conditional value-at-risk, stress tests, etc – has the Sarb used, and what has worked best? How has trade execution evolved during your tenure?

Risk management has evolved to incorporate a broader and more sophisticated set of metrics, including market risk measures and stress-testing, consistent with international best practice. Trade execution has progressively shifted toward electronic platforms, improving price discovery while remaining guided by best-execution principles.

How are you factoring geoeconomic uncertainty emanating from the US into your reserve management decisions and the effects on the value of the US dollar and US Treasuries? Specifically, how do you view US debt sustainability, the threat to Federal Reserve independence (something that the Sarb experienced in 2016–19) and the liquidity in US markets?

The Sarb regularly considers a wide range of macroeconomic, financial and geopolitical factors when assessing reserve composition, including developments in the US economy and financial system. Despite periodic uncertainty, the depth, liquidity and resilience of US Treasury markets continue to support a significant allocation to US dollar assets. One factor that has supported diversification, however, is the return of positive interest rates in major jurisdictions like the euro area. Negative-yielding assets are highly problematic for reserve managers with capital-preservation mandates. Negative rates therefore led us to adopt an overweight-dollar position. We have been able to adopt a more balanced allocation now that most economies have positive rates again.

What were the most important upgrades you made to the Sarb’s trading and back-office technology platforms over the years? What are your thoughts about cloud-based and AI tools?

Key upgrades include the adoption of electronic trading platforms and straight-through processing, which have improved efficiency, reduced operational risk and enhanced control environments. The Sarb has formulated cloud and AI policies, but AI tools have not yet been integrated into core reserve management processes.

The rand’s exchange rate is sensitive to commodity prices. How have these fluctuations shaped your tactical and strategic approaches to reserve management?

Reserve management decisions, including currency composition and asset allocation, are not directly based on short-term movements in commodity prices or their impact on the rand. Instead, the Sarb focuses on longer-term structural considerations and external vulnerability metrics.

How has your management of gold reserves changed, given the soaring price of the ‘barbarous metal’ during the past 18 months? Has the Sarb monetised the value of its gold holdings via location swaps or other derivatives, or looked at ways to lock in some of the rise in value?

The Sarb’s allocation to gold has remained broadly stable, with volumes essentially unchanged over the past two decades, reflecting gold’s role as a long-term reserve asset. Developments in gold markets are closely monitored.

In 2014, the Sarb was a co-signee of the multilateral Inter-Central Bank Agreement with the other founding members of the Brics organisation (Brazil, Russia, India and China). In the 10 years since the agreement, how has it shaped reserve management at the Sarb and other members?

The Brics framework has primarily facilitated co-operation, knowledge-sharing and relationship-building among member central banks. We consider this part of the broader safety net underpinning South Africa’s financial stability, alongside the FX reserves and other facilities from multilaterals.

The Sarb sought a swap line facility from the Federal Reserve during the Covid-19 pandemic and also reached an agreement with the People’s Bank of China. How have these swap facilities influenced reserve management decision-making?

The Sarb has not pursued a swap line with the Fed, although, like other central banks, we have access to the Federal Reserve’s Foreign and International Monetary Authorities Repo Facility. We also have bilateral arrangements with other central banks, including the PBoC. These have not fundamentally altered reserve asset allocation decisions, although they are useful backstops, which could be used to source liquidity during episodes of market dysfunction in key global funding markets.

Many central banks in Africa have been increasing their exposure to renminbi in reserves. How do you see the currency composition of Brics countries’ reserves evolving as trade and economic links (loans) are amplified, not just in terms of the RMB?

Trade patterns, particularly the currency denomination of imports and external liabilities, play an important role in determining reserve composition. As trade and financial links among Brics economies deepen, this may gradually be reflected in reserve currency diversification over time.

Looking to the impact of technology on this dynamic, how in your view are wholesale central bank digital currencies (wCBDCs), tokenised deposits, stablecoins or digital assets poised to affect the composition of reserves? Would the Sarb potentially join a Brics-based settlement system backed by gold?

Wholesale CBDCs, tokenised deposits and other digital settlement technologies are monitored closely, but are unlikely to materially affect reserve composition in the near term. The Sarb continues to assess such developments on a case-by-case basis, with no immediate plans to alter existing arrangements.

Each year, the five-year strategic asset allocation (SAA) is reviewed. What have been key considerations during the annual SAA review in recent years?

Reviews focus on reassessing interest rate risk, credit risk and broader market conditions to ensure alignment with the long-term objectives of reserve management. Recent reviews have not resulted in significant changes to the overall risk framework.

In 2015, the Sarb also expanded the investment mandate for its internally managed reserves to include China, South Korea, Japan, Australia, Sweden and Canada, and Australia later in 2022, when the Sarb’s fifth five-year SAA (reviewed annually) was implemented. What is forefront in your mind as the sixth SAA (in 2027) is prepared? Which other currencies and assets have you considered, or are you considering, including?

Preparation for the next strategic asset allocation continues to be guided by the existing investment policy framework, which generally prioritises developed-market currencies and high-quality assets. The Sarb has moved to annual SAAs, and is currently implementing the latest SAA.

The rand is used in the Common Monetary Area, incorporating the Namibian dollar, Lesotho loti and Swazi lilangeni, where the Sarb plays a central role in setting regional monetary policy. How does the CMA inform your reserve management?

As reserves are held to insure against South Africa’s own external vulnerabilities, rather than regional monetary arrangements, regional arrangements like the CMA have little bearing on our reserve management practice.

Reflecting on a quarter of a century of reserve management, what are the more pertinent lessons you could share with colleagues around the world as they prepare and build resilience in for an increasingly uncertain future?

At the Sarb, maintaining diversified asset classes and a strong governance framework has been essential. We have developed and continuously refined a comprehensive strategic asset allocation process, subjecting it to peer review over the past two decades to ensure efficient investment management. Recognising the need to enhance our portfolio management capabilities, we have also prioritised ongoing skills development, and adopted advanced risk and portfolio management technologies. Consistent investment in these areas within the reserve management value chain has continued to serve us well.