Why the SABMiller megadeal is a headache for the Reserve Bank

Picture: The Times

But, as often happens with the rand, right now the major determinants of its short-term value are external factors. Post-Brexit nervousness has prompted central banks across the globe to signal they are ready to take whatever action is necessary to prop up their economies.

This means interest rate hikes are off the table.

And while in 2016 the rand has managed to regain a little of the hefty losses it suffered against the dollar in 2015, sterling’s post-Brexit weakness has also seen the rand notch up gains on that front in the past week.

Which brings us to the potentially biggest short-term influence facing the rand right now — the prospect of Anheuser-Busch InBev (AB InBev) handing over about £6bn to SABMiller’s South African shareholders.

That’s SA’s share (equivalent to 8%) of the £74bn megabrew merger that is expected to be completed in the second half of 2016.

But while the prospect of strong demand for rand is usually always good, this level of demand is certain to give the Reserve Bank a few headaches. The bank is tasked with protecting the value of the currency, in terms of its purchasing power, which also includes sheltering it from drastic swings in value that could result in excessive volatility and affect financial stability.

A £6bn transaction screams drama. It dwarfs, by a considerable margin, any previous transaction-related flow. Transaction-related flows (inwards or out) are by their nature dramatic once-off events, rather than longer-term flows, which means they are harder to manage.

The largest transaction in recent years was Woolworths’s purchase of control of Australian retailer David Jones in 2014. This required an outflow of $2.2bn to pay the Australian shareholders.

All of which is why the Reserve Bank has been in close touch with AB InBev since the deal was announced. It is not just that AB InBev has had to secure regulatory approval along the way, but the Reserve Bank needs to be kept informed about anything that would affect the scale and timing of the inflow.

The Bank did not comment on specific transactions in the foreign exchange market, said deputy governor Daniel Mminele.

But he confirms the general approach is that when there are transactions in the foreign exchange market that are significantly large relative to the size of the local market, the Bank has tended to engage the relevant parties to see how such transactions can be executed with minimum disruption to the market. "In some cases, this has involved the Reserve Bank purchasing foreign exchange directly from counter parties and adding the proceeds to foreign exchange reserves, with any pricing of such transactions being market-based."

Inevitably, because markets are fluid, the Bank has no hard and fast rules about how it handles these sort of transactions.

What it does is determined on a case-by-case basis, "taking into account prevailing market conditions", Mminele said.

Foreign exchange traders say, given the Reserve Bank’s impeccable reputation, it would be reckless to try to second-guess what its strategy will be on this mega deal.