Click to edit Master subtitle style

Monetary Policy ReviewApril 2020

Having monetary policy space, and using it

1

“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

2

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

3

Sharp decline in global growth forecasts

-4

-2

0

2

4

6

8

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

y/y,

(%

)

Evolution of trading partner growth forecasts

Previous MPR

Mar 2020 forecast

Latest forecast

Source: SARB

4

Massive spike in volatility and flight to dollars

0

10

20

30

40

50

60

70

80

902

00

8

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Ind

ex

VIX

Source: Bloomberg

800

900

1000

1100

1200

1300

1400

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

Ind

ex

Bloomberg Dollar Index

Source: Bloomberg

5

Major central banks cutting interest rates, expanding balance sheets

0.0

0.5

1.0

1.5

2016 2017 2018 2019 2020 2021 2022

%

G3 interest rates

Source: SARB. G3 – weighted US, euro area, Japan

* Dotted line indicates forecasts

GFCQE1

QE2QE3

COVID-19

April 1: US$ 5.8 trillion

0

1000

2000

3000

4000

5000

6000

7000

2006 2008 2010 2012 2014 2016 2018 2020

US$

bill

ion

s

US Fed Balance Sheet

Source: FRED, St Louis Fed

6

Sudden stop in capital flows to emerging markets

-100

-50

0

50

100

150

2005 2008 2011 2014 2017 2020ytd

Cu

mu

lati

ve U

S$ (

bill

ion

s)

EM portfolio flows

Equity Flows Debt Flows Total Flows

Sources: IIF and SARB

7

EM policy space more available now…

-175

-150

-125

-100

-75

-50

-25

0Tu

rkey

Sou

th A

fric

a

Per

u

Cze

ch R

ep.

Mex

ico

Ind

ia

Bra

zil

Ch

ile

Ind

on

esia

Co

lom

bia

Po

lan

d

Thai

lan

d

Ru

ssia

Mal

aysi

a

Taiw

an

Ch

ina

Ch

ange

s si

nce

31

Jan

(b

asis

po

ints

)

EM policy rates

Sources: Haver and SARB

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

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

8

SA inflation also lower, near the middle of the target

4.6

1

2

3

4

5

6

7

2012 2013 2014 2015 2016 2017 2018 2019 2020

y/y

(%)

Headline inflation

Sources: Stats SA and SARB

3-6% inflation target range

Midpoint

9

Expectations better anchored, closer to 4.5%

1

2

3

4

5

6

7

2016 2017 2018 2019 2020 2021 2022

y/y

(%)

Two-year-ahead inflation expectations, with forecast

Sources: BER and SARB

Midpoint of inflation target range

* Dotted lines indicate blended forecasts

10

Collapse in world oil prices lowers inflation further

20

30

40

50

60

70

80

2017 2018 2019 2020 2021 2022

US$

pe

r b

arre

l

Evolution of crude oil forecasts

Actual

Previous MPR

Mar 2020 forecast

Latest forecast

Source: SARB

-20

-15

-10

-5

0

5

10

15

20

25

30

2017 2018 2019 2020 2021 2022

y/y,

(%

)

Evolution of petrol inflation forecasts

Actual

Previous MPR

Mar 2020 forecast

Latest forecast

Source: SARB

11

Weak demand also disinflationary

-5

-4

-3

-2

-1

0

1

2010Q1 2012Q1 2014Q1 2016Q1 2018Q1 2020Q1 2022Q1

% o

f p

ote

nti

al

Output gap

Previous MPR

March 2020 forecast

12

Exchange rate depreciation adds to inflation…

11.5

12.5

13.5

14.5

15.5

16.5

17.5

2016 2017 2018 2019 2020 2021 2022

R/US$ Exchange rate

Actual

Previous MPR

Mar 2020 forecast

Latest forecast

Source: SARB

-20

-15

-10

-5

0

5

10

15

2017 2018 2019 2020 2021 2022

%

Real effective exchange rate gap

Previous MPR

Mar 2020 forecast

Latest forecast

Source: SARB

Values <0 imply undervaluations

13

But pass-through to inflation now lower…

0

5

10

15

20 Rands per dollar

2015/1620081998 2001

21.86

13.5012.00

7.00 5.250

10

20

Policy rate

2020

14

Import prices also deflating… not all about pass-through

-20

-15

-10

-5

0

5

10

15

20

2015 2016 2017 2018 2019

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

15

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

2

3

4

5

6

7

2016 2017 2018 2019 2020 2021 2022

% c

han

ge o

ver

4 q

uar

ters

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

4

59

33

4

0

10

20

30

40

50

60

70

80

<3% 3% < 4.5% 4.5% < 6% > 6%

Pro

bab

ility

(%

)

Headline inflation (y/y %)

Inflation forecast probabilities

92% probability of 3-6% inflation

Source: SARB

16

SA economy expected to contract in 2020

1983: -1.8 1992: -2.1 2009:-1.5

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0y/

y (%

)Real GDP growth, y/y

6 per. Mov. Avg. (Real GDPgrowth, q/q SAAR)

17

Direct effects of shutdown detract from annual growth

-2.6

-3

-2.5

-2

-1.5

-1

-0.5

0

% p

oin

ts

Direct costs of 21 day shutdown on 2020 growth

Community

Finance

Transport

Trade

Construction

ElectricityGasWater

Manufacturing

Mining

Agriculture

GDP

18

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

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2005 2008 2011 2014 2017 2020

No

. of

com

pan

ies

Expected business insolvencies

Sources: Stats SA and SARB

±1,600 more businesses

insolvent in 2020

19

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2005 2007 2009 2011 2013 2015 2017 2019 2021

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

-2.4

0.0

-2.7

-0.5-0.8

-1.4

-4

-3

-2

-1

0

1

2

3

4

5

20

14

-Q1

20

14

-Q2

20

14

-Q3

20

14

-Q4

20

15

-Q1

20

15

-Q2

20

15

-Q3

20

15

-Q4

20

16

-Q1

20

16

-Q2

20

16

-Q3

20

16

-Q4

20

17

-Q1

20

17

-Q2

20

17

-Q3

20

17

-Q4

20

18

-Q1

20

18

-Q2

20

18

-Q3

20

18

-Q4

20

19

-Q1

20

19

-Q2

20

19

-Q3

20

19

-Q4

Q/q

SA

AR

(%

)

Real GDP growth, q/q SAAR

20

Past decade the worst for growth on record

90

100

110

120

130

140

150

160

170

180

0 1 2 3 4 5 6 7 8 9

Ind

ice

s: f

irst

qu

arte

r o

f d

eca

de

= 1

00

Year

Real GDP levels

1960s 1970s

1980s 1990s

2000s 2010s

Sources: Stats SA and SARB

21

Electricity shortages became more acute

-6

-4

-2

0

2

4

6

2012 2013 2014 2015 2016 2017 2018 2019

y/y

(%)

GDP growth

Mining+Manufacturing

Rest of GDP

Electricity, etc

Previous trough in EAF

66.9%

60

62

64

66

68

70

72

74

76

78

80

2012 2013 2014 2015 2016 2017 2018 2019

%

Electricity availability factor

Lowest EAF on record

22

Also a difficult year for agriculture

-30

-20

-10

0

10

20

30

Summer: 2018/19 Winter:2019

Summer: 2019/20

An

nu

al %

ch

ange

Agricultural crop estimates*

White maizeYellow maizeOtherWheatMalting barleyTotal

* Based on tonsSource: DAFF

23

Growth outlook uncertain into 2021 & 2022

700000

720000

740000

760000

780000

800000

820000

840000

860000

2017 2018 2019 2020 2021 2022

Rm

illio

n

Real GDP

Jan 2020 forecast

March 2020 forecast

Latest forecast

Source: SARB

24

Despite hyper-extended fiscal position

2020/21: >10%?

-10

-8

-6

-4

-2

0

2

4

% o

f G

DP

Budget balance

Sources: Mauro et al., National Treasury

25

Long-term lending cost rising

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2015 2016 2017 2018 2019 2020

%

Term premium on SA 10-year bond

Sources: Bloomberg and SARB

26

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

11.0

20

15

20

16

20

17

20

18

20

19

20

20

20

15

20

16

20

17

20

18

20

19

20

20

SA ten-year bond yields

Source: Haver. *Real yields deflated using BER 5-yr inflation expectations

EM risk generally up, but SA higher

-50

50

150

250

350

450

550

650

750

2014 2015 2016 2017 2018 2019 2020

Ind

ex

South African EMBI+ spread

SA EMBI+ spread Domestic portion

Sources: Bloomberg and SARB

27This 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

0

100

200

300

400

500

600

2015 2016 2017 2018 2019 2020

Bas

is p

oin

ts

Spread: 2-year versus 30-year bond

Source: Bloomberg

28

Repo rate down to 5.25%, lowest rate since 2014

0

2

4

6

8

10

12

14

16

2000 2004 2008 2012 2016 2020

%

Repurchase rate

Source: SARB

29

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

30

Liquidity supporting financial market functioning

8

9

10

11

12

13

14

02 05 08 11 14 17 20 23 26 29

%

March 2020

Selected government bond yields

R2030 R2048

Source: Bloomberg

Changes in liquidity strategy announced

31

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

32