The recent arrival of the Global COVID-19 crisis has resulted in a rate of exponential human infections in many countries across the world disrupting human capital, workflows, supply chains and output. Most governments have taken actions that involve lockdown periods as part of mitigation and containment measures. The virus impact will have severe negative implications for all economies with depth and duration of the decline still uncertain.
Financial markets have been in turmoil since late February leading to financial stress. This has resulted in most central banks taking swift, decisive and bold monetary policy measures. The South African Reserve Bank (SARB) announced a 100 basis points cut to the repo rate last week at its March Monetary Policy Committee (MPC) meeting, lowering the repo rate from 6.25% to 5.25%. Following this action money market rates also declined but to a slightly lesser extent (3m JIBAR declined only 90 basis points).
Prior to the MPC meeting it became increasingly clear that parts of local funding markets including the bond market is facing liquidity stress, which included increased repo rates to facilitate bond market transactions. Smooth and efficient functioning of the local bond market became increasingly challenged as we saw over >300 basis points of increases across almost the entire yield curve on ever decreasing liquidity characterised by bid/offer spreads in South African Government Bonds (SAGBs) widening out to 20 basis points to 40 basis points as of Tuesday, 24 March. Normal spreads are in the 0.5-2 basis points range.
The next action by the SARB was to increase its weekly repo operations to now conduct daily operations and extended the term of the funding operations for banks to improve liquidity in the system. The standing facilities lending rate - the rate which SARB provides liquidity to commercial banks - was adjusted to in line with repo. The SARB further reduced the borrowing rate for banks from repo -100 to repo -200. Subsequent to these actions we have seen the repo market for SAGBs become more liquid and rates were adjusted down.
In addition, the SARB on 25 March announced that they would be buying government bonds in the secondary market, adding to its existing holdings of R8.1 billion in government securities. This measure seems like an open-ended operation; no commitments have been made around the size of the programme or its duration. South African Government Bonds' purchases would be at the SARB's discretion.
All of the above SARB actions taken followed extensive consultations with local investors and a roundtable call between the Treasury, SARB and primary dealers about the lack of liquidity in the bond market. The bond fraternity, including asset managers and banks, have welcomed the SARB's moves to help normalise market conditions and prevent disorderly trading conditions, funding spreads and dislocations. The SARB communicated that it intends to continue to act and implement its expanded announced liquidity management strategy until it is satisfied that liquidity conditions in the local funding markets have normalised.
We welcome the actions taken to alleviate liquidity pressures in the banking sector and restore market functioning. The opportunity cost of not introducing the above measures would be that the government’s funding could remain at elevated levels for a protracted period, which is far from ideal at a time when gross domestic product growth is falling, and the borrowing requirement is climbing.
Links to both SARB announcements can be found below:
Changes to the money market liquidity management strategy of the SARB.pdf
Further amendments to the money market liquidity management strategy of the SARB