The South African Reserve Bank has issued an instruction to the South African banking community against the payment of dividends to shareholders and bonus payments to executives this year.
The call forms part of the temporary regulatory relief measures provided to banks in light of the economic pressures emanating from the coronavirus, coupled by the junk rating on the country’s bonds by major credit rating agencies.
Other relief measures announced by the Reserve Bank include capital relief on restructured loans, lower liquidity coverage ratio and lower capital requirements.
Nedbank Economist Nicki Weimar says, “So, what it really means is that if banks have not yet declared a dividend to the market, the Reserve bank is indicating that they can withhold that dividend. That means that they can retain earnings and that essentially, means that they will have more funds to lend out, especially to support clients and customers that might be struggling.”
The Reserve Bank has published the updated discussion documents on the proposed deposit insurance scheme for public comment.
The Corporation for Deposit Insurance will protect depositors in the event of a bank failure by paying out the maximum amount of R100 000 per depositor.
Banks will be required to make monthly premiums to the insurance scheme.
According to the discussion document, not all bank deposits will qualify for the insurance cover, investments in shares, derivatives and unit trusts will not benefit.
According to the Reserve Bank, all simple deposits, tax-free and money markets accounts will receive a cover in the event of a bank failure. The public will have until the 29th of May to send their comments to the Reserve Bank.
Economist at Citibank, Gina Schoeman shares advice on what South Africa could do reverse the junk status:
Bank guidance on dividends
Africa’s biggest lender by assets Standard Bank said on Tuesday it would consider guidance from South Africa’s central bank asking lenders not to pay dividends in 2020 as the coronavirus outbreak disrupts economies around the world.
The South African Reserve Bank’s Prudential Authority advised lenders on Monday not to pay dividends or bonuses due to the crisis, joining the Bank of England, European Central Bank and others in asking banks to skip shareholder returns.
Standard Bank, which last week told investors it had not had any guidance from the central bank that such a move was imminent, said it would consider the request and advise shareholders in due course.
“The board fully recognises the importance of dividends to the group’s owners,” the bank said in a statement. “However, it also recognises the need to support households and businesses amid the COVID-19 pandemic and the importance of ensuring the stability of the group in the short, medium and long term.”
The bank added that it remained well capitalised and liquid.
Banks pay dividends to reward shareholders and dispose of excess profits but can opt to retain these to bolster capital.
Scrapping dividends means banks can use this capital to lend to consumers and businesses instead.
SA’s growth unlikely to exceed 1%
The Reserve Bank has cut its growth forecasts for South Africa, predicting the economy could shrink by as much as 4% in 2020 due to the coronavirus pandemic, the national 21-day lockdown and the recent downgrades by credit rating agencies.
The bank says growth was unlikely to exceed 1% in 2021. In its bi-annual Monetary Policy Review, the Reserve Banks says there is limited scope for a rebound and there are downside risks to the dire forecasts should the lockdown be extended.
To view the full Monetary Policy Review, click here https://t.co/h42y1unWFt. To view the Monetary Policy Forum presentation, click here https://t.co/Ydb7srDaRn. #AprilMPR #SARBMonetaryPolicyForum #TalkToTheSARB
— SA Reserve Bank (@SAReserveBank) April 6, 2020
The country has reported 1 764 coronavirus cases, the highest on the continent, with 13 deaths. The Rand has crashed to an all-time low of above R19 to the dollar while bond yields have spiked, fuelling fears of a financial and fiscal crisis.
Significant job losses and business failures are expected, with a partial rebound following the shutdown. #AprilMPR #SARBMonetaryPolicyForum #TalkToTheSARB pic.twitter.com/TB9u8zK40m
— SA Reserve Bank (@SAReserveBank) April 6, 2020
Fitch rating agency followed on Moody’s steps and downgraded the country further into non-investment by one notch to BB from BB+ and maintained a negative outlook.
Both agencies are citing the lack of a clear path towards government debt stabilisation and increased pressure on government finances as a result of COVID-19.
All three major credit rating agencies now have South Africa at sub-investment grade ratings. The sovereign downgrade will further add to the prevailing financial market stress.
South Africa has now being excluded from the world government bond index, and this is expected to lead to further capital outflows. This as Fund Managers with investment-grade mandates will be forced to sell South African government bonds.
The coronavirus has worsened conditions for the already weak local economy now expected to contract by -2.7% this year. Dealing with budget shortfalls, borrowing costs will be significantly higher for South Africa.
The National Treasury says the downgrade could not have come at a worse time. It, however, says government remains committed to implementing structural reforms, address the weak economic growth, the constrained fiscus and implement measures to contain the coronavirus.
Chief Investment Officer of Inkunzi Investments, Owen Nkomo, said the impacts of the disease itself would be far worse:
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