After deputy finance minister David Masondo’s suggestion that the Reserve Bank should buy state bonds directly, governor Lesetja Kganyago has likened such as step to clients telling their banker to lend them money.
“When you hear government saying that ‘the Reserve Bank should be funding us’, it is tantamount to [clients] saying to their banker, ‘I instruct you to fund me,’” Kganyago said during a webinar published by Investec Wealth and Investment on Wednesday.
“The world does not work that way. And the authors of our constitution were very conscious of that when they segregated the responsibility between the fiscal and the monetary authorities.”
The remarks could be read as a thinly veiled rebuke to Masondo, who, at a recent political education meeting of the ANC in Johannesburg, supported the idea of the Bank buying government bonds directly from the state, rather than in the secondary market.
In other comments Kganyago said the Bank is not worried about inflation now and therefore has room to support the economy.
Monetising government debt, as the practice is known, is controversial because it is seen as compromising central bank independence. It could create an incentive for uncontrolled spending and debase the currency, leading to hyperinflation.
Decided independently
Kganyago, however, refused to directly address Masondo’s statements. He said that “tempting as it might be” for him to express opinions on fiscal policy after serving 15-and-a-half years at the Treasury, where he was director-general before joining the Bank in 2011 as a deputy governor, “that is something we choose not to deal with”.
While Masondo has defended his position, he also said it should be decided independently by the Bank.
As the country faces an unprecedented hit to business activity due to the coronavirus lockdown, there have been calls for the Bank to take more action to help prop up the economy, which it estimates will contract 6.1% in 2020.
Two days before the national lockdown was imposed on March 27, the Bank stepped up efforts to inject liquidity into local financial markets, saying it would buy government bonds from commercial banks and asset managers.
Stress in markets that week, with sellers trying to find buyers, pushed 10-year yields to record highs, above 13%, as investors exited riskier assets. They have since retreated to just less than 10%. The Bank has also cut its repo rate twice, by 100 basis points each, since March to 4.25%, the lowest since that system was introduced.
Kganyago said the bond-buying programme is aimed at addressing the dislocation that it has seen in the market and forms part of its own monetary policy operations to ensure that policy remains effective.
Cost of borrowing
There is, however, discussion among central banks globally over the purchasing of government bonds and the extent to which it could push central banks into making “quasi-fiscal” or fiscal policy decisions, he said.
The Bank bought about R1.1bn worth of government bonds in the last week of March, stressing that it wasn’t doing so to influence the cost of borrowing for the government.
Though Kganyago refrained from outlining a target for the purchases, he said they will continue as long as the Bank sees dislocation in the market. But central bank purchases “can do nothing where there is a concern about the sustainability of the debt of a country”.
SA is not a developed country with a reserve currency and has to consider its ability to unwind these measures once conditions normalise.
Even before the pandemic hit, government debt levels showed no signs of moderating, with the Treasury forecasting in February that debt could reach 71.6% of GDP by 2022/2023. The economic slowdown could rob the SA Revenue Service of up to R285bn, which economists have warned will widen the budget deficit and compound the debt burden.
Kganyago defended the Bank’s inflation targeting policy, which he said provides the necessary buffer to cut interest rates.
The Bank, which is due to next decide on interest rates at a meeting later this month, has forecast that inflation will average 3.6% in 2020 and stay at or below its 4.5% midpoint in the next two years. The rand’s depreciation, in which the currency has slumped 25% in 2020, has been “more than compensated” for by lower oil prices and “inflation is not our worry at the moment”, said Kganyago.
But this does not mean it should not be worried.
“We need to be able to ask ourselves what would that trajectory be over the next 18 to 24 months, but we have got the space to be able to provide support to the economy precisely because inflation is under control,” Kganyago said.
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