SA’s central bank starts buying bonds

The Reserve Bank has long resisted public and political pressure to intervene more directly in providing stimulus.

26 March 2020 | Economics

We've got a lot of room to cut, about 5% of ammunition. - Wayne McCurrie, Portfolio manager: FNB

Mfuneko Toyana - South Africa's central bank yesterday launched a bond buying programme, seeking to drum up demand in credit markets as the coronavirus epidemic weighs on the country's already ailing economy.

The Reserve Bank (SARB) has long resisted public and political pressure to intervene more directly in providing stimulus. Yesterday's move brings it into line with major central banks across the developed world that have run large-scale asset purchase programmes.

South Africa's economy will come under increasing pressure as it enters a 21-day national lockdown from today, ordered by president Cyril Ramaphosa in response to the spread of Covid-19, of which more than 700 confirmed cases have been registered, but as yet no deaths.

The country's bond market has been short of buyers since February, while daily sales of sovereign debt have regularly topped R4 billion, including a record R12.8 billion on March 2.

The bank said it would buy bonds of varying maturities in the secondary market, without giving further details.

The move should boost the take-up of government debt and make it easier for commercial banks to fund their operations.

More rate cuts

Duma Gquble, an independent economist, said it amounted to quantitative easing, "something we've called for for a long time."

"We're headed to an era where the separation of fiscal and monetary policy doesn't make sense anymore," he said.

South African banks and financial firms have in recent weeks seen a sharp increase in redemptions of short-term funds, as well as higher margin calls, while primary dealers - who buy government securities to sell on the secondary market – have struggled for buyers.

"The bond market had dried up completely, there were no buyers in sight, just sellers," said FNB portfolio manager Wayne McCurrie.

The bank delivered a surprise 100 basis point cut to its main lending rate last Thursday to help the economy, and said it stood poised to cut further if market volatility continued.

Adrian Saville, head of Canon Assets, said that was on the cards in coming weeks.

"We've got a lot of room to cut, about 5% of ammunition," he said.

"We're looking at a budget deficit in 10% territory after this passes. But in the meantime the SARB has latitude to be far more aggressive, even leaning into the world of helicopter money and giving every South African ‘x’ amount for the next three months."

In its statement yesterday, the bank also said it would offer repurchase agreements, or repos, for between seven days and 12 months. – Nampa/Reuters

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