Two ‘last resort’ options open to Treasury to save South Africa’s coronavirus-hit economy

As South Africa begins to feel the effects of a three-week lockdown and a credit rating downgrade to junk, economists and analysts are revising their economic growth projections for 2020.

The latest group to weigh in on the country’s prospects this year is French banking group BNP Paribas, which has revised its projections downwards, from a decline of 1.2% to a decline of 4.0%.

“Our forecast is based on our tweaked view for CPI inflation to average just 3.5% in 2020 from an already sub-consensus 3.8%. Our revised forecasts have far-reaching implications for fiscal deficit and debt trajectories,” it said.

Specifically, the group now estimates nominal revenues will undershoot National Treasury’s February budget forecasts by R245 billion (4.5% of GDP), cumulatively over the coming three years.

It also anticipates that nominal GDP will slide and tax buoyancy to falter further on the country’s mooted support plans to defer VAT and PAYE receipts for some small, medium and micro-sized enterprises  – “figures that undoubtedly underpinned Moody’s largely anticipated sovereign downgrade (Ba1) and maintenance of a negative outlook last Friday”.

Given the bleak outlook, BNP Paribas said it is absolutely not business as usual in South Africa, with more policy restructuring needed from both Treasury and the South African Reserve Bank (SARB).

Notably, Treasury has already indicated that it is only likely to announce changes to its weekly issuance schedules in the weeks after after the country has emerged from its three-week lockdown period.

The SARB, meanwhile, recently made the decision to purchase South African Government Bonds (SAGBs) in the secondary market to help improve liquidity and market access.

According to BNP Paribas, it is not convinced these measures are enough, and that the South African government will end up having to go further, possibly pushing the boundary of what is currently politically palatable.


Go to global financiers

“We would not be surprised to see the Treasury and SARB approach global lenders such as the IMF (for its ‘Rapid Financing Instrument’) to try and access shorter maturity funding at more palatable interest rates,” it said.

While historically economists have argued that the ruling ANC would steer clear of approaching such organisations for fear of losing its ‘sovereignty, these are extraordinary times, the bank noted.

“If the Treasury is able to tap global lenders of last resort without having to opt for a full-fledged IMF programme (therefore, devoid of the strong economic reform conditionality that go along with it), we think that there is a good chance policymakers will explore these avenues in the coming months – this is backed by comments from the SARB and National Treasury this past weekend,” it said.


Prescribed assets

Aside from this approach, Treasury has other options open to it, but BNP Paribas says this might be a “step too far” for government.

“There are some regulatory controls that the SARB and National Treasury could consider in the event that the domestic funding situation gets progressively worse, we think.

“These could include adjusting the prudential limits of the country’s banks, pension funds and asset managers temporarily to force some repatriation of offshore capital towards SAGBs (for instance, many pension funds, we believe, utilise most of their 30% offshore investment allowance).

“However, the read-through to a politically contentious ‘prescribed assets’ policy and return to more draconian capital controls, at this stage at least, is a double edged sword for a country running twin deficits and heavily reliant on external funding which risks being crowded out in such a scenario.

“Therefore, such a decision is unlikely to be taken lightly and one that policymakers most likely want to avoid for as long as they can,” the group said.

The group noted, however, that in the context of the uncertainties and unprecedented economic and fiscal challenges the country faces though, “never say never”.


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Two ‘last resort’ options open to Treasury to save South Africa’s coronavirus-hit economy