South Africa Announces Stimulus Package to Contain COVID19 Impacts

• South Africa Announces Stimulus Package to Contain COVID19 Impacts

The South African Reserve Bank (SARB) announced measures to stimulate the economy with extra liquidity following a 100 basis points reduction in interest rates a day ago.

The central bank had said the economy continues to struggle due to weak global commodities and a series of internal factors that plunged Africa’s second-largest economy into recession in the final quarter of 2019.

“When markets are tight the SARB needs to ensure that banks have easier access to funding and that there is sufficient liquidity in the market,” said Alvin Chawasema, a trader at Sasfin Securities in Johannesburg. “They are lending cheaper to banks now and making it more punitive for banks to park money at the SARB, effectively encouraging inter-bank lending and activity.”

This was after the Central Bank of Nigeria (CBN) announced a N1.1 trillion stimulus package to support affected sectors and strengthen the healthcare industry.

Apex bank directed Deposit Money Banks (DMBs) in Africa’s largest economy to extend loan tenors to accommodate present disruption in business activities while interest rates on intervention facilities were lowered from 9 percent to 5 percent to support small businesses affected by the pandemic.

Like Nigeria, South Africa’s stock index rose by 8.4 percent, the most on record since Bloomberg started tracking the index while the Rand extended gains by 1.6 percent to 17.1871 against the US dollar as investors seem to welcome the announced package.

The central bank said it will:

Conduct intra-day overnight supplementary repurchase operations at 10 a.m. and 1 p.m. daily, except on Wednesdays, to provide liquidity support to clearing banks. The amount on offer will be decided on the day in line with the prevailing money market liquidity conditions.

Adjust the standing facilities borrowing rate – the rate at which the central bank absorbs liquidity – to the benchmark repurchase rate less 200 basis points, from the current repo rate less 100 basis points.

Adjust the standing facilities lending rate – the rate at which the SARB provides liquidity to the commercial banks – lower to the repo rate, from the prevailing rate of the repo rate plus 100 basis points.

“The bond market has been driven by a shortage of cash,” said Michelle Wohlberg, a trader at FirstRand Bank Ltd. in Johannesburg. “So, now that the SARB has announced repo transactions, the strain on the cash liquidity will be alleviated, and we might see investors step up to buy bonds. This was what the market was hoping for in yesterday’s meeting.”

The World Health Organisation (WHO) on Friday warned that the pace of spread has increased from weeks ago as the total deaths due to the pandemic surged to over 10,000 with more than 239,000 people infected across the world.