South Africa's Robust Banking System
The Nedgroup Investments Cash Solutions Money Market funds have received positive net flows for the week so far. This is unusual as traditionally the money market funds experience outflows towards the end of a month.
Yields have held up well with the Nedgroup Investments Core Income fund rate having only declined by 4bps since the 100bps rate cut a week ago. Please refer to our note of 23 March 2020 in which we illustrate the delayed impact of the rate cut on our fund’s yields. The yield spread of our funds over call rate has increased due to this lag effect.
We trust you receive our daily rates with the daily joke appended under the heading “and finally”. Below is a summary of today’s gross nominal rates:
Note that the institutional call rate from the big four banks is currently in the region of 5%.
Liquidity levels in the fund are at all-time highs – substantially above minimum regulatory requirements, and credit risk is at all-time lows as we continue with our approach of rather erring on the side of caution.
The full Cash Team is now working remotely after a seamless transition over the last three weeks. We are pleased that service levels have been uninterrupted and that it is business as usual. But we continue to monitor the financial markets closely, and to remain close to our customers.
Moody’s is scheduled to publish their view on South Africa’s sovereign rating after markets close tonight (from 11pm SA time onwards). We have no reason to believe that they have any other option but to downgrade South Africa from investment grade Baa3 to junk status Ba1 or lower, especially given recent market events. This has been Taquanta’s core view for some time now, hence our previous communications to investors over the last few months, explaining the reasoning behind us de-risking all the Nedgroup Cash Solutions’ portfolios in anticipation of the potential market volatility that may result from a downgrade. This conservatism was extremely beneficial to the portfolios during the COVID19 crisis and we have since then also taken steps to generate even further liquidity, to ensure the funds can confidently withstand any additional market volatility or liquidity concerns which may arise after the ratings announcement, whilst still maintaining competitive yields on the funds. The SA Reserve Bank has recently also introduced a number of unprecedented measures to provide sufficient liquidity to the financial system in order to avoid any systemic threats as a result of further volatility, which supports our position that the Nedgroup Cash Solutions’ portfolios are as well prepared as we can possibly be in order to face this crisis.
The range of liquidity funds remains a sound place to park surplus funds until these are needed. They provide liquidity, and yield within our overriding starting point of capital preservation. With diversified exposure predominantly to the large South African banks via a single liquid vehicle, there is little benefit to investing directly with the individual banks – at lower yields. Please read on below as we explain the strength of the South African banking system.
South Africa's robust banking system
The South African banking system is globally recognised as being well managed and structurally sound. It is highly regarded amongst international peers. Our banking system navigated the 2008 Global Financial Crisis better than just about any other region, without a single casualty and no banking bailouts being required over that time. Following the 2008 crisis a new set of rules, Basel 3, was put in place for banks, which tightened capital restrictions, reducing their balance sheet risk and making banks even more resilient in tough times. The fact that South African banks were leaders in adopting these guidelines has further strengthened their position.
The below extract from Business Day on 23 March 2020 elaborates on the stable and relatively closed banking industry:
“The bigger message that the banking industry and regulators conveyed was that the country’s financial systems are sound. It has the appropriate mechanisms and tools in place to navigate what will be a difficult period ahead, said Mike Brown, chair of the Banking Association SA (Basa), in an interview on Sunday. “It is vital to point out that SA has a very strong and stable banking system that is recognised the world over,” said Brown. “For sure all financial systems are going to be facing challenges as a consequence of the economic slowdown but South Africa is in a good place to deal with these headwinds given the existing strengths of our financial system. ”Due to the operations of South Africa’s exchange rate control regime, rand liquidity cannot move out of the country and remains within SA’s financial system, Brown said. “We have seen time and time again in periods of crisis the overall rand liquidity funding pool remains stable, which means there is enough for banks to fund themselves, which is an enormous strength in our system,” Brown said.
It was subsequently announced that the South African Reserve Bank will be providing additional liquidity to the market in two areas, namely being a buyer (of potentially last resort) for government bonds as the number of people selling bonds versus buying has reversed materially in the short term. This forces prices down which unless stemmed by the SARB, further compounds the problem. This helps the banks as primary dealers in these instruments and eases the strain on their liquidity positions. The benefit to money market funds is that this helps prevent any substantial widening of the bid/offer spreads on negotiable money market assets.
It was comforting to hear President Ramaphosa commit to use all measures within his power to offset the economic costs of this crisis. This undertaking was extended to the South African Reserve Bank, which the President stated “is ready to do whatever it takes" to support the financial sector.