South Africa’s central bank began to buy government bonds on Wednesday in a bid to unblock strained local money markets as Africa’s most industrial economy braces for a three-week national lockdown to stem the spread of coronavirus.
The South African Reserve Bank (SARB) said in a statement that its aim in launching the bond purchases was “providing liquidity and promoting the smooth functioning of domestic financial markets”.
It added: “The amount and maturity of the bond purchases will be at the discretion of the SARB.”
SARB is the third big emerging market central bank this week to launch market-calming measures in a bid to tackle the disruption caused by coronavirus.
Colombia’s central bank decided on Monday to spend about $25bn buying debt instruments issued by private credit institutions with remaining maturities of up to three years, while Brazil’s central bank said it would inject about $240bn of liquidity into its financial system through a string of measures including reduced reserve requirements and loans to banks, though it stopped short of asset purchases.
Colombia and Poland took similar steps last week. The Philippines has also announced plans to buy government bonds.
South African bonds rallied after the central bank’s announcement. The yield on benchmark 10-year government debt had risen from 9 per cent at the start of this month to 12.35 per cent this week, reflecting a drop in prices, but fell below 12 per cent on the news.
Trading in the bonds had seized up in recent days, leading to sharp falls in the market as investors pulled out money from South Africa and other big emerging economies at a record pace.
“This is a major, very much necessary, crossing of the Rubicon by the SARB in response to the breakdown of local liquidity conditions and dysfunction in recent days in the bond market,” said Peter Attard Montalto, a capital markets analyst at Intellidex, the South African research group.
The central bank did not refer to the bond purchases as quantitative easing, and it did not disclose how it was paying for the debt. Western central banks conducting QE have typically issued base money reserves to banks for the bonds they buy.
“The market will call this QE though we prefer to call it asset purchases,” Mr Attard Montalto said.
Lesetja Kganyago, SARB governor, had previously said that interest rates are high enough in South Africa that the bank does not yet have to follow the unconventional monetary policies of western peers who have already slashed rates to near zero. South Africa’s benchmark interest rate is 5.25 per cent, after a cut of 1 percentage point by the bank last week.
Last year the central bank came under political pressure from factions in the ruling African National Congress to unleash QE, as part of what many analysts saw as a bid to undermine its independence.
“A country in a challenging financial situation [such as South Africa] wouldn’t be advised to do much of this because it is a form of the central bank financing the government, which if you go very far with, will destroy confidence in your currency and lead to a potentially hyperinflationary scenario,” said Gary Greenberg, head of emerging markets at Hermes Investment Management. “In limited quantities it may be OK, but one is playing with fire.”
Kieran Curtis, investment director, emerging markets at Aberdeen Standard Investments, said the actions would be welcomed by South Africa’s commercial banking sector.
“Domestic banks . . . have had to take down lots of government bonds from foreigners in the past few weeks, and they are stuck with these bonds at a time when domestic business is drawing on liquidity lines,” Mr Curtis said.
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Wednesday’s bond purchases were among a number of market-calming measures announced by the central bank ahead of a national lockdown ordered by President Cyril Ramaphosa that will take effect from midnight on Thursday.
South Africans will have to stay at home and all non-essential businesses will close under the lockdown, posing serious challenges for what is already a stagnant economy. The number of confirmed Covid-19 cases in South Africa rose to more than 700 as of Wednesday, compared with slightly more than 100 a week earlier.
Economists estimate that the lockdown could slice 6 percentage points off South Africa’s gross domestic product growth this year. Before the pandemic reached South Africa’s shores most forecasts, including the central bank’s, had already assumed the economy would grow by barely 1 per cent in 2020.
South African bonds may face a further test on Friday, when Moody’s could strip the country of its last remaining investment-grade rating. Last month the New York-based agency cut forecasts for economic growth in 2020, prompting speculation that the move would precede a downgrade of its rating to junk, in line with Standard & Poor’s and Fitch, the other big ratings groups.
Additional reporting by Jonathan Wheatley