To survive this crisis, South Africans need a 5% interest rate cut

19 March 2020

The South African Reserve Bank (SARB) has an historic duty on 19 March, when five members of the Monetary Policy Committee (MPC) led by Governor Lesetja Kganyago decide to lower interest rates. As of 18 March, the stock market has fallen 38% from its January 2018 peak, most over the past ten days, leaving many worker pensions funds in the red. The currency has fallen from R14/$ to R17/$ in recent weeks. And debt levels are so high for most working-class households, that urgent state support is needed: a formal debt repayment holiday for suffering poor and working people who are without income in the period ahead will be crucial. Bank reserves are sufficiently large to cover this process in coming weeks, until the worst stage of this crisis is over, and informal mashonisa lenders must be clamped down on if they attempt to use coercive collection measures when our working class is experiencing such desperations.

The SARB must get the loud and clear message: financial markets are cracking up, so exceptional state intervention is now vital.

As for the MPC decision on 19 March, there are general expectations of a 0.5 to 1% drop in the ‘repo rate’ that the SARB lends to banks. But our society and the economy need a much greater drop. We call for a 5% drop in rates, from current levels of 6.25% to close to 1% - along with the rapid adoption of an airtight exchange control system to prevent capital flight.

Why is such a large drop needed? And what would be the consequences?

It is impossible to predict with certainty given the economic chaos but given that the coronavirus hits us on top of the existing stagnation, could result in the South African economy contracting dramatically. We may even suffer a formal depression: a crash of 10% in GDP. (The last formal depression was 1989-93, the longest in South Africa’s modern history; only the clear end of apartheid allowed for an upturn from 1993-98.)

Yet even if most economic activities remain suspended so as to prevent runaway infections and deaths in the hundreds of thousands, an interest rate cut will prevent ordinary people from contagious defaults that in turn would threaten South African banks.

Why is our interest rate so high?

The high repo rate we suffer as the benchmark for the cost of credit reflects how extremely expensive it is for South Africa to borrow money internationally. We need to keep interest rates high not necessarily to control inflation (which has not threatened to rise above 5% for many months), but supposedly to attract foreign flows of finance, given that since April 2017, most credit rating agency reports have considered our state to be of “junk” quality (Moody’s is the only agency not yet to fully agree but their junk rating is anticipated within the next two weeks).

We need such international inflows because we have to repay a huge foreign debt of more than $180 billion, because our outflows of profits and dividends remain unsustainable, and because our inflows of international profits to South African companies is shrinking especially thanks to the gigantic Naspers’ Tencent investment (around $150 billion at peak – more than 20% of the JSE’s valuation) fleeing to Amsterdam (as ‘Prosus’) in September 2019.

These pressures, added to the unrepayable Eskom debt and the latest economic recession (two consecutive quarters of negative GDP growth), mean that the latest Economist Financial Indicators assessment of the major economies where state debt is issued, finds South Africa paying 9.3% on 10-year bonds. That is the third highest, below only Turkey and Pakistan. There is a huge premium associated with our government bonds, suggesting that the markets believe Moody’s will “junk” these securities later this month.

Main interest rates of two central banks (for on-lending to banks): South Africa, United States

South African Reserve Bank Repurchase Rate        U.S. Federal Reserve Fed Funds Rate

So what we need now is a rejection of these trends. This would not be unusual in a world deep in economic chaos: there are major monetary and fiscal movements across the world, with even right-wing governments in Washington and London turning to lose money and a massive fiscal stimulus to mitigate the economic crisis. The U.S. Fed has already cut rates dramatically, given how dangerous its own internal corporate, household and student debt levels are.

The SARB is a laggard, and so will be blamed by society and economic historians for causing massive damage in two ways: keeping interest rates far too high thus generating mass defaults and letting too much money flood out of South Africa through lax regulation.

The latter point is critical, since according to the senior operations manager of South Africa’s Financial Intelligence Centre in October 2019, “South Africa is still losing anything between $10-billion and $25-billion annually in illicit financial flows”. The state’s regulation of mis-invoicing, Base Erosion and Profit Shifting, transfer pricing and other illegal or borderline tax avoidance and evasion measures appears non-existent. It is urgent to halt the rot, so as to give added protection from chaotic world finance especially if interest rates are lowered, catalyzing further outflows. Much tighter exchange controls should be immediately be imposed.

The SARB should – just this once – follow IMF advice!

The International Monetary Fund is one of the most conservative institutions in world economic history. Yet even the IMF recognises how serious a threat the coronavirus has become, and that we should be acting with much greater ambition to rescue capitalism from crisis.

Normally we would reject outright the idea of IMF intervention in our economy. One way this might happen is through a bailout Structural Adjustment loan if we come close to defaulting on the foreign debt, including the Odious Debt taken on for profoundly corrupt projects like Medupi, Kusile and the Transnet locomotives. (Rather than taking on more foreign debt, we should immediately declare these loans in dispute given the roles of the World Bank and other lenders in amplifying the corruption.)

However, today we despair that the SARB and Treasury are so backward – even trailing the IMF – that they will make merely tokenistic efforts to fight the current public health and economic crisis.

In recent days, the IMF released the document “Policy Steps to Address the Corona Crisis,” which includes this advice:

Central banks should support demand and confidence by easing financial conditions, ensuring the flow of credit to the real economy, and fostering liquidity in domestic and international financial markets…  through open market operations, expanded term lending, and other measures such as outright purchases and repo facilities. Monetary easing will support demand and confidence while reducing borrowing costs for households and firms. In addition to rate cuts (where there is policy space), stimulus can be provided through forward guidance about the expected path of monetary policy, and expansion of asset purchases (including risky assets)…

Monetary policy in emerging and developing economies (EMDE) will need to balance cushioning growth with tackling external pressures, including commodity price shocks and capital flow reversals. Monetary easing by the G7 will offer room for EMDE central banks to do the same to support domestic demand. Exchange rate flexibility can offset external shocks, but foreign exchange intervention may be necessary if market conditions become disorderly. In crisis or near-crisis situations, capital flow measures may need to be deployed for a temporary period…

The authorities may need to step in with additional support measures – in past crises, subsidies and tax relief aimed at smaller borrowers as well as credit guarantees and asset purchases programs to support banks have been the main vehicles, though capital injections and broad deposit guarantees have also been employed to restore confidence and stem systemic turbulence.

So the IMF is challenging the SARB’s MPC to cut rates in a way that can make a real difference. It also acknowledges that ‘capital flow measures’ (exchange controls) can be tightened. And further injection of funds to help small borrowers is also recommended.

The IMF also has a very strong statement on fiscal policy we will review soon. With Boris Johnson proposing a fiscal stimulus of 3% of GDP, South Africa should try at least as hard, i.e. pump R170 billion into the economy through mechanisms such as a Basic Income Grant. While Donald Trump has just indicated two payments to U.S. citizens in early April and mid-May will amount to $500 billion, or $1500 for each woman, man and child, Senator Bernie Sanders argues that $2000/month would be more appropriate.

This is a debate for another time, but what is revealing is that South Africa’s neoliberal economic managers – Kganyago and Finance Minister Tito Mboweni – have erred on the side of caution far too long, giving a very high reward for those with funds to save, and to lenders.

To genuinely escape the likely depression that is now gathering, a burst of economic relief in the form of interest rates 5% lower will be necessary, along with tightened control over finance.

As a final point, any economic and social crisis gives opportunity for scammers; anyone visiting a retail shop will witness this problem, as price markups are now insane, e.g. a R3.80 face mask costing eight times as much, and a small hand sanitiser going for R100 in many pharmacies. Without saying who such scammers are and where they have been observed, the SARB issued a 16 March press statement - the only thing they have said about this exceptional crisis on their “website - warning against “criminal elements visiting the homes of members of the public.” These are scammers who apparently have counterfeited some form of SARB identification. Any outing of scammers or details about when and where this happens will be welcome.

However, it is disturbing to see the SARB’s coronavirus-denialism in the same statement: “There currently is no evidence that the COVID-19 virus is transmitted through the use of banknotes and coin.” Actually, there are many studies which show that handling money can be a disease vector. Not only did the Bank of England last week warn that banknotes “can carry bacteria or viruses” but the Chinese, Korean and U.S. central banks have begun sterilisation to ensure that the public health is not threatened. We wish the SARB would take the coronavirus more seriously, in general, but also in particular with its responsibility to ensure that banknotes are not contributing to the crisis.

The most important point, however, is that the society and economy depends upon the SARB making a large cut in the interest rate, tightening exchange controls, ensuring there is a repayment holiday for those who lose their income, and even if belatedly, adopting a renewed sense of seriousness about this crisis.

Issued by SAFTU, 19 March 2020