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Deputy Finance Minister David Masondo says he would support direct Reserve Bank purchases of government debt to help fund measures to contain the spread of the coronavirus.
"The capacity of our government to raise revenue from tax and borrowing is highly limited," Masondo said in an interview with the Johannesburg-based Sunday Times newspaper. He had initially shared these views during a discussion, hosted by the ANC, on the R500 billion stimulus package to support government's response to the Covid-19 crisis.
"Covid-19 and the recent downgrades by the credit-rating agencies have worsened our economic woes. Given our fiscal constraints, I would support the South African Reserve Bank (SARB) if they decide to directly buy government bonds," Masondo told the Sunday Times.
Responding to a query from Fin24, Masondo explained that if the Reserve Bank was to purchase bonds directly from Treasury, it should do so "independently" and without "undue pressure". Such funding should be used to support Covid-19 health interventions and structural reforms to ensure long term, inclusive economic growth, he added.
The deputy minister also noted that the Reserve Bank had already taken steps to inject liquidity into the economy in response to the Covid-19 crisis, but suggested more could be done.
"My comments are not in any instance saying there should be pressure on the Reserve Bank but rather that where institutions, both public and private sector, can do more and where they still have room to manoeuvre in terms of offering support to the economy, let them do so," Masondo said.
Worldwide there are discussions on the role of central banks in times when there are multiple crises as we are currently facing, he said. "It is not surprising that everyone, not only in South Africa, but worldwide, is discussing the role of central banks. However, we should do so whilst respecting the independence of the South African Reserve Bank."
South Africa's economy could contract by as much as 16.1% this year, depending on how long it takes to contain the coronavirus pandemic and for the economy to recover, Treasury estimates show.
Any debt purchased by the Reserve Bank would be once-off "special bonds," and should be treated as a temporary measure with a clear exit plan, Masondo said.
The Reserve Bank announced on 25 March it would buy government securities in the secondary market to boost liquidity. "It is the independent decision of the SARB to decide how much money they supply and for what specific purpose in the context of price stability for balanced economic growth," Masondo said.
Political territory
Head of capital markets research at Intellidex, Peter Attard Montalto is also of the view that the Reserve Bank could do more to support government's efforts to fight Covid-19; but disagreed with Masondo's comments on the primary market purchases of bonds. Montalto suggested some form of quantitative easing won't work without real structural reforms to the SA economy.
"As the revenue hole gapes open and with National Treasury slow to raise issuance risking back loading in the fiscal year, all means that the SARB is likely at some point to have to step up – albeit incredibly reluctantly and with long term adverse consequence risk into the politics," Montalto said.
Montalto added that the deputy finance minister's comments on what the Reserve Bank should do will be "dangerous" in the long term and will "play into the politically messy future" where the bank will be expected to fund other projects.
"The simple fact is that the debt dynamic is unsustainable anyway, but more so at north of 10% yields. Something is going to have to bring it down and we don't see that as being a flood in of bond buying," Montalto said.
Additional reporting by Lameez Omarjee
*This article was updated at 18:30 on Sunday 3 Mary 2020 to include Deputy Finance Minister David Masondo's response to a Fin24 query.
