Money Market Commentary July 2020




2Q20 Money Market Commentary

By Bongani Ngwanya – Portfolio Manager

The fiscal response to the COVID-19 pandemic, which has brought a health, social and economic crises, has been exemplary. The R500 billion (‘bn’) stimulus package is 9.5% of South Africa’s (‘SA’) Gross Domestic Product (‘GDP’). The average stimulus in emerging markets is 3.7% of their GDP. Globally, $9 trillion(‘tn’) or 10.5% of global GDP will be spent on COVID-19 relief packages with the United States (‘US’) contributing the lion’s share of $3tn or 14.2% of US GDP. The largest initiatives in the SA package are as follows; R200bn will go to loan guarantees through banks, South African Reserve Bank (‘SARB’) and National Treasury; R100bn to protect jobs and salaries;  R70bn in benefits from deferring tax payments and fast-tracking Value Added Tax (‘VAT’) refunds and R50bn in extra social grant payments.

At the May Monetary Policy Committee (‘MPC’) meeting, the committee reduced the repo rate by 50 basis points (‘bps’) to 3.75%. The decision was in line with Bloomberg consensus and Forward Rate Agreement (‘FRA’) curve expectations. In the March and interim April meetings, the MPC cut the rate by 100bps with members being unanimous on the decisions. In the May meeting, three of the five MPC members were in favour of a 50bps rate cut and two members for a 25bps rate cut. With two of the five MPC members in favour of a 25bps rate cut, this might signal a return of rate moves by increments of 25bps going forward.

The SARB lowered economic growth forecast in 2020 to -7.0%from -6.1% previously, highlighting the difficulty in forecasting the COVID-19 impact on the economy. They also updated the market on their SA Government Bond (‘SAGB’) purchasing programme which provides liquidity to and enhances the functioning of the bond market across the yield curve during times when the bond market is dysfunctional. The SARB bought approximately R1bn and R10.0bn of SAGBs in late March and in April, respectively. They owned R8.0bn of SAGBs ahead of the announcement to stabilise the market in March.

The Rand recently closed at R17.00/USD, R19.15/EUR and R21.27/GBP. This is a tremendous recovery given that at the start of the lockdown the currency was trading at R18.96/USD, R20.74/EUR and R23.58/GBP. The main driver of the recovery has been improvement in global market sentiment as economic data points to a faster than expected recovery out of lockdowns, resulting in US Dollar weakening as safe haven flows are withdrawn as risk-on attitudes are restored.