Covid-19 crisis shows how vital it is to build fiscal buffers, which SA did not do

SA's failure to rebuild the fiscal buffers it that had in place when the global financial crisis struck has weighed on the country’s ability to respond to the coronavirus pandemic, SA Reserve Bank governor Lesetja Kganyago said.

In April, the government announced a R500bn support package aimed at reigniting economic growth and supporting those worst affected by a lockdown. That compares with a fiscal package of more than R800bn in response to the global financial crisis in 2008, facilitated by a budget surplus and relatively low debt-to-GDP ratio, Kganyago said Monday in an interview with Radio 702.

“If ever there was a case as to why you should build your buffers during the good times, that was it,” he said.

“Instead of rebuilding our buffers, we continued to live life as if we were richer than what we were and that was the problem getting into this crisis. You could argue that compared to 2008 that is small, but that is what we have, that is the totality of the resources we have as a country.”

SA recorded its first budget surplus since democracy in 2007, and in the 2008 fiscal year, debt-to-GDP was 26.6%. The Treasury predicted in February, before the country’s first virus case, that the deficit would swell to 6.8% of GDP and that debt would increase to 65.6% of GDP in the fiscal year to March 2021.

The central bank was able to respond to the virus with “significant boldness” because it had monetary policy buffers in place, Kganyago said. The Reserve Bank and its inflation-targeting mandate have often come under fire, especially as it became clearer over the past two years that the monetary policy committee (MPC) aimed to get price growth anchored close to the 4.5% midpoint of the target band.

Lower borrowing costs

However, that approach to inflation meant that price growth has not broken the top of the target band in three years. The panel has cut its benchmark interest rate by 275 basis points in 2020 so far, the fifth-biggest downward move by global central banks, according to data compiled by Bloomberg.

The repurchase rate is now at 3.75%, the lowest level since it was introduced in 1998. The Reserve Bank also relaxed accounting and capital rules to release additional money for lending and tripled its holdings of government debt, helping to bring down borrowing costs in the domestic bond market.

The full effects of these policy measures are likely to filter through during the gradual and phased reopening of the economy, Kganyago said.

“The kind of steps that we have taken, and the totality of them being taken with so much speed are unprecedented in the history of the bank,” he said.

“We have taken these steps within a space of three months and they were bold as far as we are concerned.”

While critics of the Reserve Bank and the government accuse it of not doing enough to support an economy that fell into a recession even before the virus struck, “we have got to accept that any response has got to be based on the resources we have or resources we can generate,” Kganyago said.

Bloomberg