Reserve Bank & Prudential Authority on their 2019/20 Annual Reports

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Finance Standing Committee

08 October 2020
Chairperson: Mr J Maswanganyi (ANC)
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Meeting Summary

Video: Standing Committee on Finance 08 Oct 2020

The Governor and Deputy Governors from the South African Reserve Bank and Prudential Authority presented their 2019/20 Annual Reports. The SARB Governor noted the economic situation in South Africa is not looking good this year. Inflation has been contained, but prices for electricity, water and municipal rates and taxes are rising more quickly than the inflation rate. The inflation on food has been doing well, especially as good rains this year are likely to contain prices, and oil prices have decreased due to a decrease in people driving during lockdown. South Africans are getting used to a low inflation rate. The Reserve Bank has introduced a stimulus package, which although not as successful in its reach as it would have liked, has had a positive impact.

Committee members asked why South Africa’s economic recovery would be slower than its peers; South Africa had one of the largest stimulus packages yet it had a relatively low impact. SARB suggested that it is still very early on to know how successful the stimulus package will be. Members asked why SARB had bought large quantities of government bonds; the range of facilities SARB had provided to the banks; if SARB had a role to play in disbursing the Covid-19 Fund for struggling businesses; and why the Covid-19 Loan Guarantee Scheme was not utilised effectively. Questions were raised about the status of financial sector transformation, licencing of Discovery Bank, illicit financial flows leaving South Africa and their destination; when SARB is exiting from African Bank and about legislation to nationalise SARB.

Meeting report

SARB & Prudential Authority on their 2019/20 Annual Reports
Mr Lesetja Kganyago, SARB Governor, was accompanied by his three Deputy Governors, Chief Operating Officer, Secretary of the Bank and the Communications Chief. The Governor mentioned how the macroeconomic outlook included in the Annual Report is already very outdated because the Annual Report was published in June, and the economic situation has changed significantly since then. He noted the SARB mandate, key functions and shareholding structure.

Macroeconomic overview and outlook
The Governor mentioned how the macroeconomic outlook is not a pretty picture.

The Governor said Covid-19 has had a huge global shock, leading to a negative growth in South Africa’s major trading partners. South Africa’s growth will be much lower, and recovery is in progress but starting from a very low point. There are indicators that some sectors are already back to pre-Covid 19 levels, however there are some indicators that suggest longer-term damage and major job losses. Although it did appear at first that unemployment had dropped, this was a statistical calculation, rather than a real reflection, because what had happened was that the labour force had shrunk, as people stopped looking for work as there was no point under lockdown. Therefore, the important figure that policy makers should be focusing on is the employment drop of 2.2 million people.

The GDP is expected to grow faster in 2021 and 2022.The big rebound expected in 2021 is due to the big contraction in 2020. It looks like a big bounce, which they call a base effect. It is recovering from a low base, which gives the impression of a boom. The economy is only expected to return to the 2019 levels in 2023. Even with a strong recovery in 2021 and 2022, we still will not be where we were in 2019.

South Africa’s growth is expected to be less than most peer countries. The reason for this is that South Africa was already in recession, and the pandemic has made things worse. Apart from Mexico and Peru, the other peer countries had contracted but less than South Africa.

This has happened despite a lot of stimulus. There are only five other countries who have provided more than South Africa. On the monetary side, they acted with scale and with speed, and this was the second highest in the world.

South Africa’s recovery is expected to be relatively slow. Even with the rebound predicted in 2021, South Africa is expected to underperform alongside peer countries.

Further, despite a weaker economy in 2020, this has been the worst ever year for load shedding, which is very strange. For example, in July when the economy was just re-opening, there was a lot of load shedding.

With these concerns, investment has been falling, which affects South Africa’s long-run growth capacity. Even when trying to get the economy going again, load shedding in July had an impact.

Aside from this, food inflation is a lot lower, which helped to contain the wider inflation picture. If we have good rains this year, this will contribute to containing food price inflation even more.

Inflation has therefore been well controlled, which has helped.

As a result of fewer people driving during lockdown, there was a collapse in oil prices, which fed into domestic fuel prices. That is picking up but nowhere close to the high point experienced previously.

Past inflation levels are important, as it shapes how people feel about inflation in the future. Policy focuses on what inflation will be in the future. Through the survey of inflation expectations, South Africans are now used to lower inflation. This has an impact because if people expect inflation to continue in this way, this provides space for continued support from the monetary policy side of the economy.

The Governor mentioned how administered prices are worrying. They have been rising faster than actual inflation. Inflation is contained elsewhere in the economy but the prices that are controlled by different arms of government have been rising faster than what we had seen on the inflation front. You could say the same with electricity, which has risen significantly in this period, as well as municipal rates and taxes.

The Governor said inflation is now back within the target range, but in May and June, it was at the lower end of the inflation target. It was important to note that that period coincided with Stats SA not being able to survey certain elements of price formation processes, so they had to use statistical techniques to impute what they think would have been the price rises of those particular categories of inflation. Inflation is expected to remain in target, as long as the central bank can provide monetary stimulus.

SARB acted with scale and with speed, which has meant that the prime lending rate is at a 55-year low.

Repo effects showing up in household credit
The implemented monetary policy stimulus is beginning to show effects in household credit. A chart showed what has been happening with mortgage loans granted and one can see that there has been a big rebound. Again, although we must be careful how we interpret this figure, due to the April and May lockdown, people were not looking at purchasing houses and even when they had made offers, the Deeds Office was closed so transfers could not take place. Therefore, when you had the re-opening of the economy, the rebound was big. This rebound is faster than in other years.

The low repo rate has also helped with government borrowing costs. The debt is higher but the average interest rate is lower. This shows that SARB was able to take the government debt and service costs, as a percentage of the debt. SARB were able to take the government debt and take it as a percentage of the debt. In spite of more debt, the amount of interest paid as a percentage of that debt has gone down. This is partly because the government had been borrowing in the short end because short rates are so low at the moment, which enabled government to save in servicing costs.

Highlights from SARB 2019/20 Annual Report
SARB response to Covid-19 was done with scale and with speed. He summarised the slide on the SARB response to the Covid-19 pandemic.

Further to the slides, the Governor added that SARB saw a dislocation in the bond market as it was not functioning. They stepped into the secondary bond market to purchase bonds to improve the functioning of the market. It was important to do this as the conduct of monetary policy works through a collateral system. This collateral must be priced and SARB must be aware of what the value of the collateral is. If you have a dysfunction in the market, it is difficult to price the collateral, hence they stepped into the bond market to ensure the market continued to function and that collateral could be priced properly.

This indirectly benefited government as it funds itself in the auctions every week. If there is a dysfunctional market, government would not be aware of whether the price it charged was reflective of market conditions. SARB therefore had to ensure the market was functioning, so that government could fund itself.

Mandate expressed operationally in the strategic plan
The Governor outlined the 2019/20 strategic performance according to the five focus areas, and the financial highlights, as detailed in the PowerPoint presentation.

The Governor outlined the social investment and support programme; preferential procurement; staff composition at top and senior management; and human resources highlights.

He added that SARB does prepare for the future. They provide for what they call the coverage ratio of critical roles so they have people who would be able to step in. The coverage ratio has declined this year; it is an issue that they keep their eye on. It does not mean they cannot do their work, but if they lost particular people, they would have to recruit outside of SARB to provide for that role. He also explained regrettable turnover, which has declined this year. This ratio works as what they see as talent in SARB and if those people leave the bank, they call this a regrettable loss. They have been able to retain this.

Highlights from Prudential Authority Annual Report 2019/20
Deputy Governor Naidoo in his capacity as the CEO of the Prudential Authority, outlined the governance structures of the Prudential Authority and its response to Covid-19. As the regulator, due to its soundness, the Prudential Authority was in a fortunate position to provide significant relief to banks to continue to lend to their customers to help the economy. In a crisis, there are generally two things that happen. The first is that there is a fall in demand for credit, and the second is that there is an increase in risk aversion. These two often deepen recessions, prolong crises and slow down recovery. The Prudential Authority’s policy objective has therefore been to mitigate this as much as they possibly can by providing regulatory relief to the financial sector so they can continue to lend and support their customers.

Although it has dropped to low levels, credit extension is still positive, which is unusual on a global scale, as it suggests, notwithstanding fallen demand for credit and increased risk aversion, there has been continued lending and support to customers.

Prudential Authority: Insurance sector
There was an error on the slide. It should read that there were assets for life insurers in 2019 of 3.1 trillion rather than billion. The Deputy spoke to the administrative sanctions and penalties. Due to the pandemic, there has been a slow down in the consideration of applications for licences. It has been difficult to get the kind of information they need from entities.

In summary, Deputy Naidoo highlighted that 2019/20 was the second year of the Prudential Authority’s operation, and it was a good year in the sense that they have embedded the PA; they have built an integrated organisation with banking, insurance and financial market infrastructure and supervision. They have continued to strengthen their IT and data and human resources capacity.

Discussion
Dr D George (DA) thanked the Governor and his team for their report. It was very interesting as usual. He noted the point that South Africa’s economic recovery will be slower than its peers. Why would that be and how did SARB reach that conclusion?

Dr George highlighted how our economy was already underperforming before the pandemic. Has the bank done any research into why that is so? SARB has been buying significant quantities of government bonds. He asked why this is happening. He did read in the report that there was some comment on this issue, but he wants to know why the market is not capable of functioning to absorb those bonds.

Ms P Abraham (ANC) said her first question had been covered by Dr George. Her second question on the Annual Report concerned the interest rates that were already low since January. She asked if low interest rates had been informed by the Covid-19 pandemic, or if they were just part of the economic decline from the beginning of the year.

Ms Abraham noted SARB has been providing facilities to the banks in addition to the usual options since the start of Covid-19. She asked that SARB unpack what this means. What is that range of facilities? On financials, she noted from the report that government gave 2.8% in group profits. She asked how this compared to previous years. Is there growth or is there decline?

Ms Abraham referred to social investment support and asked if the Governor can fully explain how they ensure nationwide beneficiation. Was there anything extra that the Reserve Bank did for social investment support in response to Covid-19?

Ms Abraham noted the Prudential Authority report and SARB’s restraint in giving out loans from the Covid-19 Fund that was guaranteed by government. Has SARB had any role to play in disbursing the Covid-19 Fund targeted to struggling businesses?

Mr I Morolong (ANC) asked if SARB can indicate how many government bonds it currently owns. What is the maximum position that SARB is willing to take on government bonds? The Covid-19 Loan Guarantee Scheme has been controversial, given the size of the package and the amount spent. Does SARB have a view on this, and why guarantees exist, if not utilised effectively?

Mr F Shivambu (EFF) asked about the legislation on the nationalisation of SARB. He wanted deliberation on what the next steps will be, as he had not seen a public call for submissions. This is an important issue that should be raised. SARB private ownership should be discontinued in terms of the agreement. He wanted SARB to speak to the transformation of the financial services sector. What is the outlook of black ownership of banks, insurance companies and financial institutions regulated and licensed by SARB? Has there been progress? There were deliberations in the Fifth Parliament on this. What has the Reserve Bank done in terms of achieving ownership and control patterns in line with South African demographics?

Mr Shivambu asked how is the licencing of Discovery Bank not advancing conglomerates? The people who control Discovery control RMB. How is that not a conglomerate? Considering bank ownership and control, when we give licences to the usual suspects, during and after apartheid, we are giving people further privilege.

Mr Shivambu also asked which countries are the largest destinations for South Africa’s financial outputs, both legitimate and non legitimate. Where is South Africa’s money going? The answer to this question will help with responding to the question of the role of the Reserve Bank in fighting illicit financial activities. There have been many commitments from SARB. What has the Reserve Bank done with other relevant entities? A proper understanding of that will provide an outline of most monies leaving South Africa.

Mr Shivambu thought both the Governor and the Minister of Finance exaggerate the impact of the stimulus package on the South African economy, because most of the package was loan guarantees, which were not utilised because the businesses most affected were small and medium enterprises. Small and medium businesses do not have access to services in the financial services sector like loan guarantees. The Covid-19 Loan Guarantee Scheme was a R200 billion scheme, but last time he checked, less than R15 billion was utilised. The stimulus package has been over-dramatised, and never had much meaningful impact.

He asked about the legislative process for the SARB Amendment Bill, a private member's bill, that had already been introduced to the Committee.

The Chairperson replied about the SARB Amendment Bill. As far as he knew, it was in the Committee programme. He asked the Secretary to confirm this. There will be a platform for public hearings and submissions but the Secretary will have to look at the programme before the end of this meeting to clarify where we are with the Bill.

The Chairperson noted how he does not like to ask questions, but he asked the Governor how he might want to respond to this point. The country has not had this kind of economic crisis for the past 90 years since the Great Depression. The lockdown pandemic does not seem to be something that will go away in the next year or two. As has been projected in the statistics from Statistics SA, we will continue to lose jobs. In the last two days, Treasury and Stats SA reported that 2.2 million jobs have already been lost since the end of March. The economy continues to decline. Coronavirus has battered the economy and government finances. We have never been in a deeper crisis.

The Chairperson did not know if the market forces alone can revive this economy without drastic state intervention. That state intervention includes SARB. Is it not time that the Reserve Bank look at itself as an active agent of economic transformation and job creation? Should the Reserve Bank broaden its mandate? The Chairperson acknowledged what the bank had done by reducing the repo rate and other measures, but cannot it do more? Governance on other platforms raised views about broadening the mandate of the Reserve Bank, even before the pandemic. Now the pandemic is here, businesses are closing on a daily basis and people are losing jobs. As correctly said, we are one of the countries with the highest stimulus package for the economy, but there has been little real impact on the lives of our people. Is it not time that the Reserve Bank mandate should go beyond inflation targeting, namely, defending the Rand, and broaden its mandate? Which other central banks in the world have ventured into this? This is a debate but also a reality. Unless members of your family and communities have lost their jobs and houses because they have been repossessed, you will not understand the impact of the Covid pandemic. It is a matter that has to be looked at and we cannot run away from it. We just become dismissive when we debate; we have to be factual when we debate. The Chairperson welcomed the Governor and Deputy Governor reports.

Governor response
SARB Governor Kganyago said Deputy Governor Naidoo will take the questions on the loan guarantee scheme, bank licencing and transformation and the illicit financial flows. Deputy Governor Tshazibana will take the questions on the SARB bond buying programme and facilities provided to banks. Deputy Governor Cassim would answer further questions that were difficult.

The Governor replied about why there is a slower recovery in South Africa than compared to its peers. The South African economy had its own structural challenges before the pandemic. Covid has made a bad situation worse. These problems were captured in the government diagnostic report as a precursor to the National Development Plan. The things that were meant to be done with the NDP were not done by government, and because of this, potential economic growth has been declining over a period of time, which has meant that in the event of a sudden economic shock, the economy gets thrown off course, and the impact of the shock would be so much deeper.

The Governor replied that South Africa is underperforming compared to its peers in recovery as it has not dealt with those structural constraints. For example, in July the economy was hardly growing while the economy was opening up, and then load shedding started. This was a binding constraint on investment. We need to change the structure of the economy, but this is within the control of elected officials. They know what needs to be done to change the structure of the economy. The economic structure cannot be changed through monetary policy actions, but must be done through structural policies. As South Africa has not addressed these economic structural problems when other countries have, other countries are now looking at recovery quicker than South Africa. South Africa has not built on its structures so it cannot move out of shock as quickly as its peers.

The Governor replied to Ms Abraham on whether the monetary policy adjustment was informed by the pandemic. In the main, he agreed that the answer is yes, but they had already started to relax monetary policy in January, because the inflation outlook in January indicated that inflation was going to be contained. Inflation would be closer to 4.5%, which is the midpoint of the target range. Due to this, there was scope to commence the process of monetary policy relaxation as a stimulus. SARB was able to do this because the inflation outlook had improved and inflation was expected to remain contained. When Covid hit South Africa’s shores and became more pronounced, they accelerated the process of monetary relief in March, and when lockdown extended further, they called an extraordinary meeting on Tuesday 14 April immediately after Easter, so they could provide further relief, rather than wait until the Monetary Policy Committee main meeting. They had already started relaxing but Covid meant they relaxed in terms of scale and speed.

Profit performance was indeed in decline from the previous year, but as previously said, the Bank remained profitable. This information was captured in the presentation slide on financial highlights, demonstrating that the profit had come down from R5.8 billion to R2.8 billion. Some of the things that drive profit have to do with international bond use and what happened to the exchange rate. The reduction in profit was driven in the main by the provision for loss of Land Bank paper and evaluation adjustment of shareholding in African Bank.

On social investment and support, the most extensive social investment for the Reserve Bank is the Monetary Policy Committee (MPC) Schools Challenge. This has reached over 3 200 learners and over 400 schools and is now country wide. They have people on the ground, working with the Department of Basic Education in various provinces to extend the reach of this nationwide programme.

The other support component provided has been to people with disabilities. They chose to support this particular issue because they recognised that they were not doing well in supporting people with disabilities. Through this process, they were able to identify how to bring people with disabilities into the Bank. There were about two or three people who came through this programme in the Bank.

The Governor noted that although they have not changed their social investment programme due to Covid, they did do something else. In line with the President's call, the Governor and Deputy Governors gave up a third of their personal remuneration for three months and the Reserve Bank staff also decided to give away 25% of their bonus pool to the Solidarity Fund. In addition, some staff cashed in some of their annual leave to give that money to the Solidarity Fund.

Deputy Governor responses
Ms Nomfundo Tshazibana explained why SARB started purchasing government bonds to ensure the markets continued to function. They saw towards the end of March lots of selling of government bonds and not enough buying of bonds was driven by a combination of factors outside South Africa to do with the financial markets in general. There was lots of risk aversion as the level of infections spread, and lots of sell off. Generally, when there is panic in the financial markets, there is a shift to ‘safe haven’ markets, such as stocks in the US and Japan. This affected South Africa and emerging market countries in general.

Concerning South Africa-specific events, there was an expectation that South Africa would be downgraded by credit rating agencies. Some investors started to sell their government bonds in anticipation of the downgrading of South Africa’s sovereign bonds. This combination of two factors led to the oversupply of government bonds.

The South African government bond market is very important in the capital market of the country. The corporate bond market exists but the government bond market is the biggest, and the government is the biggest single borrower. SARB took steps to mobilise conditions in the government bond market. It did not take over the role of the market but it did simulate normal market conditions, under the secondary market anyway, not the primary market. There was a focus on the functioning of the market rather than monetising the deficit of the government.

The size of the government issuance and national savings needed a healthy participation of domestic and foreign investors. The purchase of government bonds were in April and May when they saw sell offs and limited demands.

SARB bought bonds for R14 billion in April and R10 billion in May. As market conditions have normalised again, normal levels of supply and demand have returned and SARB has slowed down its purchase of bonds. The current holdings of government bonds is R39 billion. There is no limit prescribed in the SARB Act on the maximum amount that SARB can buy. There is a limit on purchases in the primary market, but this cannot be announced on a public platform as this is market information.

On the facilities provided to the banks, from mid-March the banks did not have sufficient access to the funds they would normally utilise to continue with normal lending activities. This was due to large depositors that wanted to hold onto their deposits to be able to call on these funds. At the beginning of the crisis, large business worried about future revenue told the banks they might need this money as they were uncertain of the future. They needed this money to be available. SARB provided additional windows to the banks. Normally banks come to SARB once a week on Wednesday to get funding to meet cash requirements. SARB provided additional daily facilities. Banks could come twice a day, morning and afternoon. They retained the Wednesday weekly lending facility and added lending facilities over longer periods, that is, term lending. They are still open to providing 12-month lending periods, but so far the demand has been for three months.

Deputy Governor Naidoo added that to date, foreigners have been net sellers of about R69 billion of South African government bonds.

Deputy Governor Naidoo explained that the Loan Guarantee Scheme is a public private partnership, negotiated between National Treasury and the private banks. The Reserve Bank is the administrator of the scheme and takes no direct risk in the scheme.

The nature of the agreement is that it is a risk sharing agreement, with the banks taking a share first, and then Treasury afterwards. He agreed that they would have liked the take up to have been higher, but he believed there were good reasons this did not happen.

First, the scheme was designed so that if you are a customer in good standing at the end of December and you approached your bank because you were impacted by Covid, the bank will likely give you a loan. If you are not good customer, banks are unlikely to give you one. If you are neither good nor bad, you may get a partially guaranteed amount. By the time the loan guarantee scheme kicked in, on 12 May, the commercial banks had already done a significant amount of debt restructuring and provided payment holidays to a significant portion of customers. About 24% of individual customers have received some form of debt holiday or repayment holiday or debt restructuring, with a slightly lower proportion of corporates.

There have been three buckets of support that the banks have been able to provide. The first is payment holidays, the second is loan restructures, and the third is the loan guarantee scheme. All three of these in total add up to relief of direct amounts of about R50 billion, and on gross loans and advances of about R700 billion. This is a significant share of the total loans and advances in the economy.

Therefore, the timing of the scheme and the nature of the scheme are two reasons there has been a low take up of the scheme.

In addition, there has been a fall in demand for credit which occurs when there is uncertainty. When a small business has a choice, and if they have a high level of confidence in the future, they likely will take the debt rather than retrench staff, closing down and stopping operations. But if there is uncertainty, they will be unlikely to take on additional debt. It is important for policy makers to understand that the demand for credit falls due to uncertain prospects going forward.

SARB’s view of the Loan Guarantee Scheme is that it has paid a positive role in the economy, but it has not reached as many people it would have liked to reach but he believed he had explained the context for this.

Deputy Governor Naidoo explained that, in general, when a crisis occurs, there is a lower demand for credit and there is a lower risk appetite for the banks, which is natural. They have seen a fall in credit and some risk aversion, but in general the South African banking sector has kept credit flowing. Yes, it would have been better if they had done more, but he could also understand that the banks had to worry about their own soundness and security. In previous crises, the financial sector amplified the crisis, but in this one, he believed they have mitigated the impact of the crisis. This is because the South African banking sector was safe and sound and had adequate liquidity buffers. Should it play a more positive role? Certainly, but the context and understanding that it has not contributed to the crisis this time is important.

The Deputy Governor answered questions on transformation in the financial sector. The Financial Sector Regulation Act has a primary mandate of safety and soundness, but there are also four important secondary mandates; they have a legal obligation to take into account transformation, competition, inclusion and integrity, which is informed by the Financial Sector Charter. They do not have their own scorecard. When they have meetings with the banks, they discuss all four of these secondary mandates, and their progress on meeting the requirements of the Financial Sector Charter. They examine the requirements on financial inclusion, but integrity is largely dealt with by the anti-money laundering process, which they supervise.

Transformation is a multi-dimensional objective. Black ownership, boards, human resources is an objective. Another important consideration is that there are an adequate number of black people in the supply chain, but equally important is the ability to lend to township economies. South African banks have historically not done well in lending to the small business sector. This is a 100 year problem, and there is room for progress and improvement to support small business. But, in general, the financial sector is making progress in all of these areas of ownership, procurement, human resources management, and the diversity of people it lends to. The Prudential Authority uses the Financial Sector Charter and each bank’s performance on this charter as a metric. They share this with the Financial Sector Conduct Authority.

Deputy Governor Naidoo replied about the financial outflows and their role in fighting illicit flows. There are three types of outflows that are legitimate. The largest is interest or dividend payments on government bonds and dividends and investments on the Johannesburg Stock Exchange. They know exactly who this goes to by name and location. The second is imports with the biggest being oil. They have a detailed account of who they import from and how the money flows out to pay for these imports. The third is services. A lot of those services are IT services, for example, paying for Microsoft licence fees. However, tourism also plays a significant role when South Africans go abroad as this is a service payment, and when foreigners come in, it is an income. The Governor has a detailed account of where that money goes according to country.

However, they do not know where the illicit funds go to. They have a sense and suspicions, but he wants to make two points on this. On the instruction of this Committee, government set up an inter-governmental committee including the police, Hawks, SARS, Reserve Bank, Financial Intelligence Centre (FIC) and National Treasury to combat illicit financial flows. There has been steady progress in this committee. There has been improving cooperation between agencies and entities in government to curb financial flows. Their co-operation with SARS and the FIC has grown in leaps and bounds. As an example of steady progress, five years ago, when he came into this job, they were freezing 20 accounts a year to a value of R30 to R50 million. Now, between freezing accounts and forfeitures, they are doing about R200 to R250 million a year, totalling at least R300 to R400 million. There is one forfeiture that ran into the billions. They have dramatically improved. All of this is available in the government gazette; there is full transparency and no secrecy. However, even more cooperation is still needed between the various agencies and entities.

Deputy Governor Rashad Cassim said the Chairperson had asked an important question on the role of SARB in stimulating the economy. He wanted to distinguish two things.

At beginning of the pandemic, the important function of monetary policy was cash relief. When you reduce the interest rate, you make two assumptions. The first is that those who have loans will experience more cash flow as the interest rate on their mortgage and other loans go down, and they will use this money to stimulate aggregate demand. This is why we say 100 basis points cut in the interest rate will give a 0.3 to 0.4% increase in GDP. That was important in the first part of the pandemic stimulus. This revolved on the idea that you provide stimulus in March and April, when there was a lockdown and spending was constrained except for necessities. He thinks what will happen as the economy opens up is that the effect of the stimulus through monetary policy will be seen over the next few months, which is an important part of it.

The second point is that there are a number of ways that one can feel the pulse of the economy. For example, in the US, they have an employment mandate. There is no country that has an employment target because monetary policy is too crude an instrument to deal with something like employment. In South Africa, they use something called an output gap, which is more technical, similar to an employment mandate. He explained what an output gap meant. It can be said that the economy is performing below potential and monetary policy has a role to stimulate the economy. In a sense, its inflation targeting is very flexible, and it has scope to stimulate the economy when the output gap is negative, given the inflation mandate.

He wanted to emphasise that countries that have introduced quantitative easing have done so because they did not have an interest rate tool to stimulate the economy. In an ideal world, if a country’s interest rate was pre-pandemic 0.5 points, they would have to go to a negative interest rate. One of the ways they practically do this is they introduce their balance sheet; they buy more bonds to stimulate the economy. In the South African case, they have a very powerful tool. He believes that SARB will continue to stimulate the economy. They are in stimulation mode. If inflation becomes even more benign, there will still be scope to stimulate the economy. This is very important, and we cannot lose sight of the fact that the most effective tool to stimulate by SARB is the monetary policy tool. Countries that do not have this tool have to work very hard to stimulate the economy.

The Deputy Governor replied about the Discovery Bank licencing. He did not want to answer in public about a individual bank or institution, but he does want to make the point that there is a trade-off between encouraging competition in the financial sector and entrenching incumbency. Its view was that the licencing of Discovery Bank would promote competition in the financial sector. This is a financial institution that it believed could compete well with the Big Six.

It should also be noted that since the publication of the draft standards on conglomerate supervision, there have been at least two changes in the financial structure in the South African economy, with two conglomerates announcing unbundling transactions. He believes there is a direct relationship between the draft standards publication and these two financial transactions. If there is a concern about competition, he advised the Chairperson that this should be dealt with by the competition authorities.

Follow up questions
Mr Shivambu asked if the Committee can receive a detailed account about all financial institution compliance with transformation according to the Financial Sector Charter. This will encourage accountability and ensure there are consequences if the Charter's transformation aspects are not complied with.

He asked that the Committee be given at least the countries to where the money goes, including destinations that are tax havens. This will help the Committee know where to look when examining tax avoidance and profit shifting, which defines a lot of multi-national corporations. This is not a multi-agency issue as the Reserve Bank is better placed to deal with this. It should matter to the Reserve Bank who controls RMB and Discovery. It may be competition, but it is a competition of siblings. When there is a crisis of other entrants into the financial sector, the Bank should care who the role players are. Its licencing reproduces the ownership inequality of banks. He would like clarity on when SARB is exiting from African Bank. They cannot be regulator and owner. Other banks must exist instead of African Bank, because it violates competition laws how it stands now. We need to know when the exit will be.

SARB response
The Governor noted that SARB might be better placed at doing things, but if there is tax shifting occurring, that is for SARS to deal with. They do not have taxpayer information and only SARS has that.

The Governor said the Deputy Governor had outlined legitimate and illicit outflows. This could have been explained further. Within illegitimate outflows, there is also the issue of money flowing out through the bond market due to selling them or if those with shareholding have sold the shares. In the South African bond market, with a turnover of R80 trillion, the money is constantly moving. Due to this, it is held via a repository offshore. If the monies are illicit, by definition, they have gone out illegally so one cannot tell exactly where they have gone.

There are detailed reports by individual institutions on how they have complied with the Charter objectives. The Committee Chairperson must help here as, by law, SARB cannot disclose regulatory information. The easiest way for the Committee to gain this information would be to call each individual institution and ask how they have dealt with these measures. It used to be the practice of this Committee to receive an annual report on the Financial Sector Charter. He did not know why this has not been continued. This was an accountability mechanism. The Financial Sector Charter Council used to come to this Committee. However, even then, the report was not broken down per institution, but gave an overview of the state of the sector.

The Governor replied that he cannot comment on Discovery Bank. There was particular regulatory action to ensure fair competition. He would caution asking SARB to comment on individual institutions. It is within the power of this Committee to do this instead. If SARB started to comment on individual institutions, it would be violating its regulatory prescripts and the privacy provisions of Acts of this country.

The Governor replied that the Reserve Bank would like to exit from African Bank. It is not something it wants to hold onto. When similar collapses happened elsewhere in the world, treasuries took control, precisely to address Mr Shivambu’s concerns. However, the South African Treasury was not prepared to come in. The banks could come with the money because they were worried about the effect on the banking system. It has always been understood the banks would have to exit. It is not profitable for one bank to invest in another because this would be an impediment to capital.

SARB has appointed a transaction advisor to exit African Bank. There are provisions in the resolution agreement that said that when SARB exits, it must exit in the same proportion as the banks. If SARB sells 50% for example, the banks must also sell 50%. The process is in motion, but given the current situation, there are timing issues with respect to markets. They cannot put taxpayer money at risk by exiting merely in order to exit. That is why they have a transaction adviser.

Deputy Governor Naidoo pointed out that the Financial Sector Charter Council publishes reports on the status of transformation. The Committee is better placed to get this data directly.

He stated that when the Reserve Bank publishes its quarterly bulletin, it does publish a statement by country on South African holdings of savings abroad and vice versa. It does not quite tell you the flows, but gives an idea where assets are held.

He added that the one category of financial flows he did not mention was remittances. They are significant, mainly to neighbouring states, but sometimes as far as India, China and Somalia. When they are done electronically or through regulated dealers, they do track those funds.

Chairperson concluding remarks
The Chairperson referred to the financial sector transformation report and noted the Committee summit last year was on 26 November 2019: Transformation in the Financial Sector: stakeholder engagement. There were many stakeholders who attended that meeting and they agreed to have a follow up session because those meant to lead that meeting were not prepared that day. They would report to Members on the next action steps.

Public participation on the SARB Amendment Bill will be on 11 November. There will be public hearings, oral and written submissions.

There is an outstanding report from the government team dealing with illicit financial flows. That team was meant to report earlier in the year, but this was disturbed due to the pandemic. The Chairperson asked the Secretary to follow up and ensure they get this outstanding report.

He noted there are certain items that the Committee itself must take up with National Treasury directly. It was noted in the induction week in Pretoria last year that they cannot expect SARB to give individual opinions on policy, as SARB would be entering the political space. It is the Committee’s responsibility to engage Treasury when it come to present the economic recovery plan. He gave the example of the output gap, raised by Deputy Governor Cassim, as a political issue.

The Chairperson remarked that the economy is declining. If we look to the Great Depression of 1929-34, we will have another five years or so of economic stagnation.The bank is projecting some growth at some stage. We will have to reconcile all of these projections and how this will translate into creating jobs. The economy should not just grow but the structure has to change. Those marginalised should come into mainstream. If we talk about restoring the economy only for those who control it, this will be problematic. We must talk about inclusive growth. If not done in this way, it would not have much impact for the people of this country. This will be discussed when the Committee meets with Treasury.

The Chairperson thanked the Governor and Deputy Governors and SARB and Prudential Authority officials.

Meeting adjourned.

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