Bold move as Bank turns to ‘quan­ti­ta­tive eas­ing’

• Govern­ment bonds be­ing bought in sec­ondary mar­ket

Business Day - - FRONT PAGE - Carol Pa­ton and Warren Thomp­son

As the Covid-19 cri­sis takes hold of SA, the Re­serve Bank fired its own bazooka on Wed­nes­day step­ping into the sec­ondary bond mar­ket to pur­chase govern­ment bonds with newly cre­ated money.

The govern­ment bond mar­ket has been un­able to func­tion nor­mally for the past week, with yields spik­ing to record highs due to a short­age of buy­ers. This has dire im­pli­ca­tions for the cost of bor­row­ing by the Trea­sury, which must raise an aver­age of R1.1bn a day to fund the coun­try’s bor­row­ing re­quire­ments.

Govern­ment’s across the world, es­pe­cially the US and Europe have pumped huge stim­u­lus pack­ages into their economies to com­bat the ef­fect of the sud­den stop brought on by the pan­demic.

The move was wel­comed by the mar­ket and — although the Bank avoids the term — is widely per­ceived to be a form of quan­ti­ta­tive eas­ing, a pol­icy in which the cen­tral bank prints new money and in­jects it into the econ­omy.

Bonds surged and the rand gained for a sec­ond day run­ning, also boosted by op­ti­mism in global mar­kets that the US would pass a mas­sive stim­u­lus pro­gramme to counter the eco­nomic ef­fect of the coro­n­avirus out­break.

The Bank did not pro­vide any de­tails on the quan­tum or length of the pro­gramme, say­ing only that it would last un­til “mar­ket con­di­tions re­turn to nor­mal”.

Deputy gov­er­nor Fundi Ts­haz­ibana said in an in­ter­view on Wed­nes­day that the Bank would not be ster­il­is­ing the pur­chases and would there­fore be ad­ding funds to the money sup­ply.

“Es­sen­tially these pur­chases of bonds are un­ster­ilised pur­chases and hence it is ac­tu­ally newly cre­ated money.

“The Sarb will not be us­ing its for­eign ex­change re­serves for the pur­chases of bonds, how­ever, the Sarb will be in­ject­ing fresh liq­uid­ity into the mar­ket.”

How­ever, it would also not in­ter­vene in the pri­mary mar­ket, he said.

“We will only be buy­ing bonds in the sec­ondary mar­ket, so we are not fund­ing the govern­ment di­rectly nor at­tempt­ing to in­flu­ence the price at the auc­tions. This is an op­er­a­tional

interventi­on to en­sure the mar­ket func­tions,” she said.

In­vestec Wealth & In­vest­ment in­vest­ment strate­gist Brian Kan­tor wel­comed the move.

“In nor­mal cir­cum­stances, print­ing money to fund spend­ing leads to in­fla­tion. But in these cir­cum­stances, there is no demand — demand is col­laps­ing as peo­ple lose their in­comes. It’s about try­ing to get in­come into peo­ple’s hands so that they can buy food and es­sen­tial items, oth­er­wise they will starve to death. The Bank has fi­nally come to terms with the sit­u­a­tion,” he said.

The move will lower the cost of bor­row­ing, as the yields in the sec­ondary mar­ket in­form the bids at auc­tions, and in­crease the govern­ment’s abil­ity to is­sue debt at a time when it is mak­ing so­cial-eco­nomic com­mit­ments to counter the ef­fects of the coro­n­avirus pan­demic.

On Wed­nes­day, it brought bond yields lower im­me­di­ately, but not to pre-Covid-19 lev­els. The yield on the R2030 fell 85 ba­sis points to 11.58% from 12.38%. It has spiked from a 2020 low of 8.68% in Fe­bru­ary.

The rand gained 1.3% to R17.3011/$.

Stan­lib chief econ­o­mist Kevin Lings ex­pressed some cau­tion over the medium to long term dan­gers of SA en­gag­ing in quan­ti­ta­tive eas­ing.

“If the pur­chases are funded out of printed money then, over a pe­riod of time, that could be a prob­lem for SA as we are not a re­serve cur­rency and could get pe­nalised by the mar­ket.”

In­tel­lidex an­a­lyst Peter At­tard Mon­talto said the an­nounce­ment was a “ma­jor Ru­bi­con­cross­ing mo­ment”.

“The Sarb is not call­ing it QE. Ver­sus how other cen­tral banks started QE it’s also not re­ally QE – it isn’t pro­vid­ing base money re­serves in ex­change for buy­ing bonds from banks.

“How­ever, it is a quan­tity mea­sure and a mone­tary eas­ing mea­sure. The mar­ket will as such think it quacks like QE and so is QE. We pre­fer just to call it ‘as­set pur­chases’, At­tard Mon­talto said.

The Covid-19 cri­sis, which ar­rived in SA at a time of a weak fis­cal and de­te­ri­o­rat­ing debt sit­u­a­tion, will have a ma­jor ef­fect on the fis­cal frame­work and the coun­try’s am­bi­tions to con­sol­i­date its debt bur­den.

In the Fe­bru­ary bud­get, the 2020/2021 deficit was pro­jected to be 6.8%. It will now prob­a­bly be far higher, with At­tard Mon­talto pro­ject­ing 10% and Lings 9.5%.

The bond-pur­chas­ing pro­gramme was an­nounced on Wed­nes­day morn­ing along with ad­di­tional mea­sures to ex­tend re­fi­nanc­ing op­er­a­tions.

The Bank will also now of­fer a re­fi­nanc­ing op­er­a­tion with a term of three months.

Last week, the Bank changed the rates on its stand­ing fa­cil­i­ties — the rate at which the Bank ab­sorbs liq­uid­ity — was amended to the repo rate less 200 ba­sis points from repo rate less 100 ba­sis points.

This may be amended fur­ther “should it be ev­i­dent that liq­uid­ity is not be­ing trans­mit­ted to other fund­ing mar­kets”.

1.3% the rand’s gain on Wed­nes­day to R17.3011/$

/Esa Alexander (More in­side)

Aware­ness no­tice: A ‘Stay Home’ bill­board is in­stalled on Wed­nes­day on an apart­ment build­ing on the corner of Long and Kloof streets in Cape Town, be­fore the coun­try goes into a na­tion­wide lock­down for 21 days from Fri­day to slow the spread of the coro­n­avirus.

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