Further interest rate cuts by the Sarb to stimulate the economy are highly unlikely.Photo: Bongani Shilubane/ African News Agency (ANA)
JOHANNESBURG - Most emerging economies are at the mercy of developed economies and financial markets, and monetary policy directives are effectively forced on them, hampering growth and political and financial stability.

It is often forgotten by economists and economic policymakers that most capital flows into emerging or developing economies are for the benefit of foreign investors, to profit from the improved financial conditions brought about by soaring commodity prices or other special situations, while similar high returns are hard to come by in developed markets.

When global growth prospects diminish, these scalpers bail out or even take the opposite stance by shorting the financial assets, resulting in a very weak currency. A country, its economy and citizens may end up in a weaker position than before the upswing.

To counter the often disastrous fallouts from short-term capital inflows by foreign scalpers and to put South Africa on a faster growth path, alternative ways to augment the monetary policy of the SA Reserve Bank (Sarb) are needed as soon as possible.

I took my cue from the policies followed by the central banks of the largest emerging economies in the world: China and Russia.

Unlike most other countries, China uses the reserve requirement ratio (RRR) as one of its main tools in setting and implementing monetary policy. The RRR is the amount of cash, as a percentage of deposits, that commercial and foreign institutions must hold as reserves at China’s central bank, the Peoples Bank of China (PBoC). The PBoC’s main challenge over the past 18 years was to sterilise huge fluctuations in foreign exchange flows, in order to control growth in money supply and fight inflation.

The RRR is raised when huge capital inflows are experienced, and to slow down economic growth, to keep inflation in check. The PBoC cuts the reserve requirement rate to increase banks’ liquidity during times of significant capital outflows and to boost economic growth.


The PBoC, as a ministry of the State Council, belongs to the central government directly, and the government interferes in the economy.

China’s cabinet decisions over where some of the freed-up reserves should be lent are executed by the PBoC. For example, over the past six months the cuts in the RRR have been in line with the policy to encourage more targeted lending to vulnerable sectors of the economy, including small firms, agricultural production, innovation, the poor and education.

Other central banks rarely adjust the reserve requirements, because it may cause immediate liquidity problems for banks with low excess reserves. The PBoC developed tools to overcome liquidity problems caused by adjusting the RRR.

Although the Bank of Russia has both proprietary and financial independence, its capital and other property are federal property. Perhaps the main aspect of the Russian system is that, according to the Federal Law on the Central Bank of the Russian Federation, “the required reserve ratios may not exceed 20percent of a credit institution’s liabilities and may be different for banks with universal licences, banks with basic licences, and non-bank credit institutions”.

Indication of health

The RRR is an indication of the health of the banking sector in the country. The current regulatory requirement under Basel 3, developed by the Bank for International Settlements after the 2007/09 financial crisis, is a capital adequacy ratio of 8percent, plus a country’s specific buffer.

The current regulatory capital adequacy ratio in South Africa is 10percent (8percent under Basel 3, plus a buffer of 2percent) and is likely to peak at 10.5percent. The PwC Major Banks Analysis covers the four major banks in South Africa: FNB, Nedgroup, Absa and Standard Bank. Collectively, the time-weighted capital adequacy ratio of the four banks in 2017 was about 16.1percent, and it has fluctuated between 15.2percent and 16.1percent since 2012.

From reports following the Viceroy onslaught, Capitec’s ratio is 36percent. According the World Bank and the IMF Global Financial Stability Report, which use a different algorithm than Basel 3, South Africa’s bank capital to assets ratio in 2017 was 8.8percent and compared favourably to the 7.5percent of the Organisation for Economic Co-operation and Development’s member countries. The numbers, therefore, suggest that the South African banks are well capitalised.

More importantly, it means that the big four South African banks held 61percent in excess of the capital they were required to hold, given their risk weighted assets. With the four major banks’ risk-weighted assets totalling R2947billion, it means that the excess total qualifying capital held by the banks amounts to nearly R180bn.

In terms of the size of the South African economy, it means that the banks have the capacity to increase their risk-weighted assets by the amount equal to 35percent of South Africa’s gross domestic product (GDP) in current money terms and still be compliant with Basel 3’s capital adequacy requirements. The top four banks’ weighted assets averaged nearly 65percent of the country’s GDP since 2012, while in 2017 they dropped to 63percent.

The accumulation of excess qualifying capital can be attributed to a significant slowdown in the growth of risk-weighted assets held by the banks, as the growth rate dropped to just more than 4percent in 2017, compared with 10percent in 2013 and 2014.

Growth in risk assets held by the big four banks is highly correlated with business confidence. Although consumer confidence sky-rocketed in the first quarter, business confidence remains lacklustre and is waning on the back of the trade tensions between the US and China.

Further interest rate cuts by the Sarb to stimulate the economy are highly unlikely.

Moral suasion

Moral suasion is one tool, and we have already seen President Cyril Ramaphosa making inroads to get the banking sector to assist in funding ailing parastatals.

Although it will not have a direct positive impact on the economy, it will at least provide some stability in regard to some essential resources. Moral suasion can perhaps be used to get the banks to reduce their interest rate margin on interest-earning advances and ease their lending standards

During trying times over the past three years, the Sarb stuck to its mandate in terms of section 224 of the Constitution: “The South African Reserve Bank, in pursuit of its primary object, must perform its functions independently and without fear, favour or prejudice, but there must be regular consultation between the bank and the cabinet member responsible for national financial matters.”


I am not questioning the independence and autonomy of the bank, as it is entrenched in the Constitution, but has the time not arrived for the Sarb to come to the party and be proactive to get the economy going, particularly in light of the uphill facing the global economy and financial markets? As mentioned earlier, China successfully uses the RRR as one of its main tools in setting and implementing monetary policy.

The health of the banking sector in South Africa is excellent, as excess total qualifying capital held by the banks amounts to nearly R180bn, or 5.5percent of total money supply (M3). Adding the setting of maximum limits for qualifying capital ratios for banks as a tool in setting and implementing monetary policy will not undermine the independence or autonomy of the Sarb, but it will assist the Sarb to ensure that the outcomes of policy changes are met.

Unlike China, where the PBoC belongs to the central government directly and where China’s cabinet decisions as to where some of the freed-up reserves should be lent are executed by the PBoC, the Sarb will not be in a similar position if it adds maximum limits for qualifying ratios as a tool, as it is privately owned and operates under its own Act: the SA Reserve Bank Act 1989 (as amended).

Alternative ways to augment the Sarb’s monetary policy exist, but it will require a major change in the mindset of labour, government, economists and the financial sector in this country to put South Africa on a faster growth path.

Ryk de Klerk is an independent analyst. Contact [email protected]

The views expressed here are not necessarily those of Independent Media.