Quantitative easing would hurt, not help, South Africa’s finances: Kganyago

The South African Reserve Bank will resist calls to finance the government’s growing budget deficit with aggressive quantitative easing because that could add even more strain on the National Treasury, governor Lesetja Kganyago said.

If the central bank were to buy R500 billion ($29 billion) of government bonds and then mop up the excess liquidity by issuing bonds at the current repurchase rate of 3.75%, it would be insolvent in about a year, Kganyago said in an online lecture Thursday.

“A big quantitative-easing operation wouldn’t lift the budget constraint,” he said. “Instead, it would end up saddling Treasury with yet another bankrupt government enterprise asking for a bailout.”

The Reserve Bank has been adamant that its buying of government debt in the secondary market since March is aimed at reducing market dysfunction, and is not quantitative easing.

It held state securities worth R30.8 billion ($1.77 billion) at the end of May, with total purchases since the start of the program amounting to around R25 billion, Kganyago said.

Critics of the central bank have said it could do more to shore up public finances that were already under strain before the pandemic hit.

“Sometimes I think that if we just told people our asset purchases were quantitative easing, they might stop complaining that ‘the SARB is conservative’,” Kganyago said in the lecture, organised by the Johannesburg-based University of the Witwatersrand.

“We should not, however, simply assume that our conditions require full-blown quantitative easing, or that we can pull it off without creating unintended and damaging consequences down the road.”

Large-scale quantitative easing with a positive inflation rate means that the central bank would have to either allow the benchmark interest rate fall to zero, or sterilize the asset purchases by absorbing rands back onto its balance sheet, Kganyago said.

An interest rate that is too low could drive inflation, while sterilization would be costly, he said.

“Quantitative-easing proponents in South Africa have not appreciated the inescapability of this choice,” he said.

Budget constraints

The country’s public finances have deteriorated rapidly over the past decade, partly due to a series of bailouts for loss-making state-owned companies including Eskom Holdings SOC Ltd and South African Airways.

In February, the government predicted that the budget deficit would swell to a 28-year high of 6.8% of gross domestic product, and some forecasts are now at double that due to a lockdown meant to limit the spread of the virus that’s weighing on output and government revenue.

The shortfall could exceed 10% of GDP in the fiscal year through March 2021, according to the Reserve Bank. The largest gap on record was 11.6% of GDP in 1914, followed by 10.4% in 1940.

The economy could contract by 7% this year, the most since the Great Depression, when output fell by 6.2% in 1931, according to central bank data. The bank is closely monitoring data and is “ready to act as appropriate” in accordance with its mandate, Kganyago said.

In addition to bond purchases, the bank cut the repurchase rate by 275 basis point this year to the lowest level since it was introduced in 1998. It also relaxed accounting and capital rules to release additional money for lending.


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Quantitative easing would hurt, not help, South Africa’s finances: Kganyago