SA pumps-up liquidity, JSE to get strict on rules

South Africa’s central bank announced a raft of emergency liquidity measures on Friday to ease the stress on banks caused by the coronavirus outbreak, while the stock exchange regulator may take its own steps as surging volatility tests financial stability.

The head of the Johannesburg Stock Exchange (JSE), which is Africa’s biggest and one of the top 20 in the world by market capitalisation, told Reuters on Saturday the bourse decided against shortening trading hours after consulting with market players late on Friday.

“We have consulted with market participants. We considered it (shortening trade hours), but in the end decided against it so trading will remain as is for now,” said Leila Fourie, chief executive of the JSE.

Fourie said the JSE would enforce stricter enforcement of rules prohibiting uncovered, or naked short-selling to ease the growing liquidity crunch, as well as lengthen the mandatory halts to trading known circuit breakers.

“Our rules require that short selling is always covered. To the extent that short sales are done and scrip is not available during settlement, this obviously causes a systemic risk to the settlement system,” Fourie said.

Turkey, Greece, Spain and South Korea are among the countries that have either banned or restricted short selling of stocks recently to shield their markets from volatility and heavy selling.

“What’s concerning about the current selloff is it’s been persistent and lasting … for over two weeks now,” Fourie told Reuters.

“Our market cap was 17 trillion rand at the beginning of the year. Now it’s at 12.5 trillion. That’s 4.5 trillion rand wiped off the exchange.”

Liquidity crisis

The South African Reserve Bank’s (SARB) move on Friday follows a 100 basis point cut to its main lending rate on Thursday to help the flagging economy and comes amid severe liquidity strains in funding markets.

Central banks the world over have been slashing interest rates and pumping trillions of dollars into the financial system, helping trigger a 1% recovery in global stock markets on Friday.

South African assets have come under huge strain in the past two weeks as the coronavirus has rapidly spread around the world, and some local banks have struggled to access short-term funds.

As of Friday South Africa had more than 200 confirmed coronavirus cases, but no reported deaths yet.

Since the beginning of February the rand has plunged more than 10%, bond yields have risen to all-time highs and around 4.5 trillion rand ($259 billion) has exited the JSE in heavy selling across emerging markets.

“In recent days, as financial markets have come under increased pressure with the spread of the COVID-19 pandemic, the SARB has observed liquidity strains in various funding markets,” the bank said in a statement, less than 24 hours after announcing its policy decision.

Three measures

The bank announced three changes on Friday aimed at the money market, which facilitates shorter-term borrowing by banks and the government. It lowered the rate, or standing facility, it provides liquidity to commercial banks.

Other measures included daily fixed-rate auctions to provide liquidity to clearing banks, with an interest rate equal to the repurchase rate, currently at 5.25%.

“The (rate) cut yesterday did not do enough to normalise interbank market conditions,” said George Glynos, director and head of research at ETM Analytics.

“This is an indication that pressures on interbank markets through credit constraints is building significantly. The measures are timely and the SARB has been quick off the mark, but we’ll have to wait and see if they work,” said Glynos.

The equity exchange said it was still considering emergency measures after seeing volumes more than double to around 680,000 deals a day from an average of 280,000, while mandatory trading halts leapt 2,000%.

“The margin calls have been unprecedented, and at exorbitant levels,” said JSE chief Fourie.