Turmoil awaits markets
on Friday, having reached 12.38% on March 24. It has risen from a 2020 low of 8.68%. The rand was at R17.62/$, down a fifth in 2020.
SA’s downgrade will mean an eventual exit from global bond indices such as the FTSE Russell World Government Bond Index, which is tracked by global institutional investors.
The downgrade will exacerbate the weakening in the rand that has followed the crisis and poses a risk for the government’s funding programme, Tshepiso Moahloli, the acting head for asset and liability management in the Treasury, said on Sunday during a briefing with Mboweni and Bank governor Lesetja Kganyago.
Potential outflows could range between $5bn (R88bn) and $12bn, based on estimates from various sources, she said.
The picture is complicated by FTSE Russell’s delay in rebalancing the index until the end of April. That means passive funds do not have to rearrange their holdings, which would have meant forced sales of SA bonds.
The delay will leave the local bond market “in a period of severe uncertainty as to the timing of actual flows”, said Citadel chief investment officer George Herman.
“Markets will attempt to price this fundamental change, which means that in the short term both the rand and SA bond yields will come under pressure.”
The downgrade was followed on Saturday by proposals from the Reserve Bank to help ease liquidity pressures and to make it easier for the country’s banks to provide relief to customers affected by the crisis.
The proposed directives include lowering the level of liquid assets that a bank must maintain to cover it during a crisis period, known as the liquidity coverage ratio (LCR).
The steps were aligned with what regulators are doing internationally, said Mike Brown, chair of the Banking Association SA and Nedbank CEO. The proposed LCR reduction would enable banks to use the liquidity that was now in the banking system for increased use in the real economy, said Brown.
The restructured credit exposures would ensure that banks could help clients affected by Covid-19 without penalties in regulatory capital, he said.
“Taken together, they show proactive use by the [Reserve Bank] of macro prudential regulation to support the real economy,” said Brown.
The steps to enable banks to give their customers debt relief would provide a significant stimulus to the economy and still leave the Bank with room to cut interest rates, said Gina Schoeman, SA economist at Citi.
According to Citi’s estimates, a three-month payment holiday on 10% of all consumer debt — such as mortgages, vehicle loans and credit cards — would put an estimated R14bn back into the economy. A three-month payment holiday on all consumer debt could inject R140bn.