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Monetary Policy Review
April 2020
Having monetary policy
space, and using it

“A good banker will have accumulated
in ordinary times the reserve he is to
make use of in extraordinary times.”
Walter Bagehot, Lombard Street, 1873

Overview
•
COVID-19 biggest shock to global
economy since Lehman Brothers’
bankruptcy
•
SA economy likely to contract this year, by
at least 2%
•
Monetary policy has space to respond,
given lower inflation
•
Stronger recovery needs “bridging” and
longer-run fixes

Sharp decline in global growth forecasts
-4
-2

y/y, (%)
Evolution of trading partner growth forecasts
Previous MPR
Mar 2020 forecast
Latest forecast
Source: SARB

Massive spike in volatility and flight to dollars

Index
VIX
Source: Bloomberg

Index
Bloomberg Dollar Index
Source: Bloomberg

Major central banks cutting interest rates,
expanding balance sheets


%
G3 interest rates
Source: SARB. G3 – weighted US, euro area, Japan
* Dotted line indicates forecasts
GFC
QE1
QE2
QE3
COVID-19
April 1: US$
5.8 trillion

US$ billions
US Fed Balance Sheet
Source: FRED, St Louis Fed

Sudden stop in capital flows to emerging markets
-100
-50

2020ytd
Cumulative US$ (billions)
EM portfolio flows
Equity Flows
Debt Flows
Total Flows
Sources: IIF and SARB

EM policy space more available now...


Turkey
South Africa
Peru
Czech Rep.
Mexico
India
Brazil
Chile
Indonesia
Colombia
Poland
Thailand
Russia
Malaysia
Taiwan
China
Changes since 31 Jan (basis points)
EM policy rates
Sources: Haver and SARB

y/y (%)
Emerging market inflation
Sources: Haver and SARB
* Unweighted average of Brazil, Chile, China, Colombia, India, Indonesia, Malaysia, Mexico,
Peru, Philippines, Russia, South Africa and Thailand

SA inflation also lower, near the middle of the target
4.6

y/y (%)
Headline inflation
Sources: Stats SA and SARB
3-6% inflation target range
Midpoint

Expectations better anchored, closer to 4.5%

y/y (%)
Two-year-ahead inflation expectations, with forecast
Sources: BER and SARB
Midpoint of inflation target range
* Dotted lines indicate blended forecasts

Collapse in world oil prices lowers inflation further

US$ per barrel
Evolution of crude oil forecasts
Actual
Previous MPR
Mar 2020 forecast
Latest forecast
Source: SARB


y/y, (%)
Evolution of petrol inflation forecasts
Actual
Previous MPR
Mar 2020 forecast
Latest forecast
Source: SARB

Weak demand also disinflationary


2010Q1
2012Q1
2014Q1
2016Q1
2018Q1
2020Q1
2022Q1
% of potential
Output gap
Previous MPR
March 2020 forecast

Exchange rate depreciation adds to inflation...


R/US$ Exchange rate
Actual
Previous MPR
Mar 2020 forecast
Latest forecast
Source: SARB


%
Real effective exchange rate gap
Previous MPR
Mar 2020 forecast
Latest forecast
Source: SARB
Values <0 imply undervaluations

But pass-through to inflation now lower...

Rands per dollar
2015/16


Policy rate

Import prices also deflating... not all about pass-through


y/y (%)
Import and consumer prices,
matched items
CPI components
Matching UVI components
Source: SARB
3.7%
-1.3%
CPI items
Matched UVI items
Average price change, 2015-2019

Inflation likely in the bottom half of target this year, but stable

% change over 4 quarters
Targeted inflation forecast*
* The shaded bands show confidence intervals of 10%, 30%, 50% and 70%.
3–6% inflation target range
Sources: Stats SA and SARB

<3%
3% < 4.5%
4.5% < 6%
> 6%
Probability (%)
Headline inflation (y/y %)
Inflation forecast probabilities
92% probability of 3-6% inflation
Source: SARB

SA economy expected to contract in 2020

y/y (%)
Real GDP growth, y/y
6 per. Mov. Avg. (Real GDP
growth, q/q SAAR)

Direct effects of shutdown detract from annual growth


% points
Direct costs of 21 day shutdown on 2020 growth
Community
Finance
Transport
Trade
Construction
ElectricityGasWater
Manufacturing
Mining
Agriculture
GDP

Partial rebound post-shutdown, but offset by job losses,
business failures


No. of companies
Expected business insolvencies
Sources: Stats SA and SARB
±1,600 more
businesses
insolvent in 2020


y/y (%)
Expected employment growth
(formal sector)
Sources: Stats SA and SARB
±370,000
formal
sector
jobs lost
in 2020
The economy was in recession before COVID-19


2014-Q1
2014-Q2
2014-Q3
2014-Q4
2015-Q1
2015-Q2
2015-Q3
2015-Q4
2016-Q1
2016-Q2
2016-Q3
2016-Q4
2017-Q1
2017-Q2
2017-Q3
2017-Q4
2018-Q1
2018-Q2
2018-Q3
2018-Q4
2019-Q1
2019-Q2
2019-Q3
2019-Q4
Q/q SAAR (%)
Real GDP growth, q/q SAAR

Past decade the worst for growth on record

Indices: first quarter of decade = 100
Year
Real GDP levels
1960s
1970s
1980s
1990s
2000s
2010s
Sources: Stats SA and SARB

Electricity shortages became more acute
-6
-4
-2

y/y (%)
GDP growth
Mining+Manufacturing
Rest of GDP
Electricity, etc
Previous
trough in EAF
66.9%

2012 2013 2014 2015 2016 2017 2018 2019
%
Electricity availability factor
Lowest EAF
on record

Also a difficult year for agriculture
-30
-20
-10

Summer: 2018/19
Winter:

Summer: 2019/20
Annual % change
Agricultural crop estimates*
White maize
Yellow maize
Other
Wheat
Malting barley
Total
* Based on tons
Source: DAFF

Growth outlook uncertain into 2021 & 2022


Rmillion
Real GDP
Jan 2020 forecast
March 2020 forecast
Latest forecast
Source: SARB

Despite hyper-extended fiscal position
2020/21:
>10%?


% of GDP
Budget balance
Sources: Mauro et al., National Treasury

Long-term lending cost rising


%
Term premium on SA 10-year bond
Sources: Bloomberg and SARB


SA ten-year bond yields
Source: Haver. *Real yields deflated using BER 5-yr inflation expectations
EM risk generally up, but SA higher
-50

Index
South African EMBI+ spread
SA EMBI+ spread
Domestic portion
Sources: Bloomberg and SARB

This chart shows a decomposition of the SA EMBI+ spread, a measure of sovereign SA risk, into its general (blue) and
idiosyncratic (red) drivers. General drivers are common to emerging markets; the idiosyncratic ones are SA-specific.
Yield curve now very steep... weakening policy impact

Basis points
Spread: 2-year versus 30-year bond
Source: Bloomberg

Repo rate down to 5.25%, lowest rate since 2014

%
Repurchase rate
Source: SARB

Private sector credit from banks
R billions
Corporations
Households
Total
Stock of debt:
Feb 2020
R 1,795.6
R 1,744.7
R 3,540.3
Implied financing costs:
Feb 2020*
R 159.5
R 155.0
R 314.5
Implied financing costs:
Mar 2020**
R 143.2
R 139.1
R 282.3
Savings from March 2020 cut p/a
R 16.4
R 15.9
R 32.3
Share of GDP
0.32%
0.31%
0.62%
*Assumes simple interest loan at prime
**Assumes capital increases in new loans offset repayments of existing loans
Note: All figures are seasonally adjusted and denominated in R billion, unless otherwise specified
...frees up cash for households and businesses, less impact on
growth

Liquidity supporting financial market functioning

%
March 2020
Selected government bond yields
R2030
R2048
Source: Bloomberg
Changes in liquidity strategy announced

Conclusions
• COVID-19 a major shock to already weak economy
• Monetary policy space opened, despite currency weakness
• Ease the cost of adjustment, “bridging” to recovery
• Broader reforms crucial for improving growth