Some call it quantitative easing, others disagree. But what is not in doubt is that South Africa's central bank steadied bond markets amid the pandemic by buying government debt, and may be forced to prolong its spending spree if the upcoming emergency budget fails to stabilize state finances. And the longer it does so, the bigger the risk that investors will flee.
The South African Reserve Bank, or SARB, launched its bond-buying program in late March as the coronavirus crisis sparked panic-selling of emerging market debt. That led government bond yields to surge to "unsustainable levels," according to financial services provider Investec, prompting SARB's intervention.
The central bank stressed its actions did not constitute quantitative easing, which usually occurs when a country's interest rates are near-zero. South Africa's benchmark rate is 3.8%, down from 6.3% in February as SARB slashed borrowing costs in response to the pandemic.
"There's a legitimate point in why you wouldn't call it quantitative easing — the objective of classic QE is to pump money into the system, whereas what the Reserve Bank has done doesn't have that objective," said Stuart Theobald, chairman of Intellidex, a financial markets research and consulting company. "SARB's objective is to shift rates — what it's doing is consistent with monetary policy. It's not about stimulus."
But George Glynos, co-founder, director and head of research at Johannesburg's ETM Analytics, said SARB's actions are QE in all but name.
"SARB has been at pains to point out that its actions were to ensure efficient functioning of the market and weren't about funding the government, but they're actually one and the same because National Treasury and government funds itself out of that same market," said Glynos.
SARB held 30.80 billion rand of government securities as of May 31, up from 9.20 billion rand in March, said Samantha Springfield, senior manager in SARB's financial markets department. The June total will be published July 5.
The central bank buys the bonds on the secondary market from approved financial institutions, not from the government directly, said Springfield.
SARB "has not set a date for the termination" for the bond-buying program, she said, and it "will remain active until such time that it deems the bond market is functioning effectively and the risks have diminished."
There is no limit to the value of government bonds that SARB can buy from other institutions, although there would be were it to purchase straight from the government.
'Huge hole in the budget'
SARB's actions have helped restore confidence and bolstered the rand, which in March plunged to its lowest level in at least a decade against the dollar before rebounding from June 10 onward.
But that could prove a fleeting respite, with South Africa's deficit likely to soar to 13.3% of GDP, according to S&P Global Ratings, and SARB forecasting that South Africa's economy will shrink 7% in 2020. The government has warned that its extended lockdown, which has been among the strictest globally, could cause up to 7 million job losses. At 2019-end the country's unemployment rate was already 29.1%. As of June 21, South Africa had reported 97,302 COVID-19 cases and 1,930 deaths.
In April, the government launched a 500 billion rand economic stimulus and social support program, and will announce an emergency budget on June 24.
"Bond buying will be directly correlated to the government's fiscal reforms ... the impact of the lockdown is so severe that it's knocked a huge hole in the budget numbers and that can only be funded out of more borrowing," said Glynos.
"South Africa's fiscal situation is clearly unsustainable, and the amount of bond issuance is pushing the envelope as to what the market can tolerate and absorb. If the imminent reforms do not return South Africa to fiscal stability, the Reserve Bank will have to continue buying bonds for some time, if not permanently."
'Investors could bail'
Unlike the U.S., the U.K. or Japan, which have engaged in near-continuous QE since the 2000s, South Africa's currency does not have a global reserve status, and extended SARB bond-buying will be fraught with danger.
"The purpose is to suppress bond yields because the more these surge the greater the chances that South Africa could default on its debts," said Glynos.
"If SARB pushes it too far, it'll be accused of monetizing debt and there'll be fears that it is losing control over price stability. That's where things can turn ugly very quickly. If there's a perception that price stability is lost and the central bank is contributing towards destabilizing the economy, investors will bail out of South Africa's bond market long before it hits the wall in terms of a default."
Tertia Jacobs, treasury economist and fixed income analyst at Investec, said SARB was wise not to set specific targets for the amount or volume of bonds it would purchase and that it would buy bonds across the yield curve.
"From SARB's perspective, it's temporary," she said. "These kinds of programs can't go on indefinitely, but the situation is still sufficiently fluid for them to continue to backstop the market."
South Africa's financial strains have forced the country to ask to borrow $4.2 billion from the International Monetary Fund. The ruling African National Congress, or ANC, has long opposed accepting loans from the IMF.
Analysts do not believe SARB's bond-buying program will make it tougher to obtain IMF funding, describing the central bank as a credible organization trusted to maintain the rand's value — for now.
"Your trust will disappear fast if you see the central bank monetizing government debt — just buying bonds direct from the government to fund government expenditure," said Intellidex's Theobald.
"You'd also worry about inflation increasing, which would undermine the whole point of managing the currency, so what the reserve bank has done walks the correct side of both lines because it's not funding government deficits by directly buying debt from government and its primary focus remains inflation."
Lower oil import costs, due to the slump in crude prices, will help keep annual inflation relatively muted at less than 4% this year, according to S&P Global Ratings, which lowered South Africa's foreign-currency rating to BB- from BB on April 29.
"Currently, the inflation outlook is benign," said Jacques Nel, head of Africa macro at NKC African Economics, near Cape Town.
That should provide SARB more room to maneuver and the duration of its bond-buying program will probably depend on how resilient the economy proves to be.
SARB is privately owned but in recent years the ANC has said it wants to nationalize it, stressing this would not change the central bank's mandate to protect the rand.
As of June 19, US$1 was equivalent to 17.32 South African rand.
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