On Tuesday 27 June, The South African Reserve Bank published its urgent application against Public Protector Busisiwe Mkhwebane’s recommendations that the Bank’s mandate in the Constitution be changed.
Despite Mkhwebane insisting that the change was merely a recommendation, the bank is arguing that it reads as an order and has approached the courts to have it struck down.
While the application describes in detail what could possibly happen to the economy should the Constitutional changes be made, Reserve Bank governor Lesetja Kganyago also outlined the effect Mkhwebane’s recommendation had in the week following the decision.
Aside from already pushing the rand weaker with the recommendations in the first place, the Reserve Bank warns that implementing Mkhwebane’s recommednations would lead to further ratings downgrades, and subsequent removal from international indices, wiping as much as R138 billion in investment from the country.
You can read the full application and attached affidavits here. The following is Governor Kganyago’s key issues as of page 27.
What has already happened: Weakening rand
“The Rand depreciated in intra-day trade by 2.05%.”
“Financial market analysts contacted the Reserve Bank’s Deputy Governor, Daniel Mminele after news of the report hit the media, seeking clarification regarding the mandate of the Reserve Bank and how this could possibly be changed.”
“In the hours after the report was released, the Reserve Bank was seriously concerned about the impact of the remedial action on the stability of our financial markets and so convened an urgent meeting with its legal team on the evening of Monday, 19 June 2017.”
“At that meeting it resolved to institute these urgent review proceedings to assure the market that steps would be taken to set aside this direct threat to its powers and independence.”
“The Rand depreciated further on 20 June 2017 when S&P Global warned that South Africa’s credit rating could be downgraded further if government acted on the Public Protector’s remedial action to change the Constitutional mandate of the Reserve Bank.
What may come: Ratings downgrades and loss of investment
“…The threat of a further downgrade of the country’s long term currency rating cannot be overstated. Financial stability in any country hinge’s on its sovereign rating which reflects its credit worthiness.”
“There are a number of channels through which which a further ratings downgrade could seriously affect confidence in and the stability of, the South African financial system. The first and most immediate channel would be South Africa’s expulsion from tho major global bond indices. Currently, South African government bonds are included in various financial market bond indices, against which global fund managers manage their portfolios.”
“Passive fund managers have to replicate the composition of these indices, which creates a natural demand for tho bonds included in the index Hence, the country’s inclusion in these indices has been greatly beneficial for South African government bonds: the demand created for South African government bonds have increased their prices, thus lowering the borrowing costs of the government…”
“…If either of the other ratings agencies were to downgrade South Africa’s local currency rating further, South Africa would no longer meet the inclusion criteria for the Barclays Group Index and it would be expelled from that index. This would have an immediate disinvestment impact on South African bonds of approximately R38 billion.”
“If both Moody’s Investors services and S&P Global were to downgrade tho local currency rating further, South Africa would no longer meet the; inclusion criteria for the Citi Bank World Index. This could have an immediate disinvestment impact on South African bonds of approximately R100 billion.”
“…The prospect of these very real and damaging effects on the stability of the South African economy has prompted the Reserve Bank to approach this court urgently to review and set aside the impugned remedial action It has moved with all reasonable speed after receiving the Report on Monday, 19 June 2017 to launch this application.