Lesetja Kganyago
“This is very serious business,” the governor of the South African Reserve Bank (SARB) pronounces as he strides, smiling, into a boardroom full of aides tapping away diligently on their phones.
Despite Lesetja Kganyago’s affable demeanour, the job of steadying South Africa’s economy since he took the helm of the central bank in 2014 has been a serious business. Since then he has had to navigate the tail end of the global financial crisis, the commodities crash, and the blood sport of South African politics during the twilight years of Jacob Zuma’s scandal-ridden presidency.
Many hope the country has now turned a corner. Markets cheered Mr Zuma’s February 14 resignation, with the rand reaching its highest level since 2015 on the announcement. Mr Kganyago welcomes the clarity afforded by the leadership transition. “I call it the settlement of the political uncertainty about who was going to lead the ruling party,” he says.
Investment flows, which receded when turbulence reigned, began to pick up again in late 2017. Part of the boost was political, as new president Cyril Ramaphosa was chosen to lead the ruling African National Congress party over Mr Zuma’s preferred candidate in mid-December. “We benefited strongly from about [then],” says Mr Kganyago. “That did not have to do so much with just appetite for emerging market assets, it had to do with us dealing with our own idiosyncrasies.”
Resilience recognised
Mr Kganyago’s leadership is being recognised internationally, as is the resilience and competence of the reserve bank, even as many of South Africa’s other institutions capitulated to political interference. In January, he was chosen to chair the International Monetary Fund’s (IMF’s) International Monetary and Financial Committee for a three-year term. “I think it is more testimony to what the institution stands for, rather than just the person running it,” he says.
Mr Kganyago laughs off rumblings that the SARB should be nationalised, calling it a political vanity project. “South Africans like owning things,” he shrugs, adding that shareholders have very limited rights, in any event. However if anyone did try to interfere in monetary policy decisions, they should be prepared. “We will fight,” says Mr Kganyago. “Not only will we throw the constitution at them, we will throw the South African people at them and the republic at them.”
Externally, few people see attempts to politicise the SARB as credible. Konrad Reuss, managing director of rating agency Standard & Poor’s in Johannesburg, says: “We’ve always said the banking sector is a supportive factor and a credit strength of South Africa. [It is] well managed, well capitalised and well regulated [by the reserve bank].”
Ratings downgrade
Both S&P and Fitch downgraded the South Africa’s sovereign rating to junk in 2017 on the back of perceived political interference in the finance ministry, sending shaken investor confidence tumbling further.
But while the downgrades were a shock to South Africa, Mr Kganyago is adamant that rectifying the credit situation is something over which South Africa retains control. “The capacity of a sovereign to repay its debt depends very much on the strength of the economy and the ability to raise taxes so you can service future debt. That is surely in the control of us as South Africans,” he says.
When the US embarked on unconventional monetary policy we had an appreciation of the rand, which was driven by massive capital inflows into South Africa
And he also remains confident in South Africa’s financial institutions. “Our banking sector is well regulated, it is well supervised, it is well capitalised, it is liquid and there are no signs of strain. That is not our concern,” he says.
Risks of protectionism
Mr Kganyago's optimism is not so unwavering when it comes to the global picture. In his new role at the IMF, he plans to champion continuity in order to consolidate recovery from the 2008 crisis. “That global policy agenda has got to be sustained, and [the IMF] has identified the correct things that must be done,” he says.
Advocating for the status quo is more fraught than it might appear, however. It is precisely this agenda – with its focus on balanced, inclusive growth underpinned by open international trade and financial flows – that is under attack in some quarters.
The return to protectionism, led by US president Donald Trump, presents the greatest risk to the recovery, according to Mr Kganyago. “For me right at the top of the agenda would be the rise of protectionism,” he says. Trade protectionism is a concern, but he also sees a trend towards discouraging companies from investing abroad. He calls this financial protectionism. Here “major countries [would] almost stop the flow of new investments to the emerging economies, saying to their companies: keep the American jobs at home”, says Mr Kganyago.
Historically, these instincts have had devastating effects, he warns, saying: “What made the Great Depression really great, really deep, was precisely the rise in protectionism because it really killed global trade. Now just as the economy is recovering, a rise in protectionism could actually undermine that growth.”
For South Africa’s relatively small, open economy this would be particularly damaging as the country looks to diversify its exports. Both are needed to help stimulate growth. “If there is a rise in financial protectionism, that would stop investments from taking place and [make] it difficult to be host to the production of some of the products that are imported into the global value chain,” says Mr Kganyago.
South Africa’s road ahead
Forging a path forward for South Africa’s economy is crucial. Though it is Africa’s most industrialised and second largest economy, anaemic growth that is only expected to expand to 1.9% in 2018 coupled with failure to fully dismantle the economic legacy of apartheid, has led to high inequality and a 28% unemployment rate.
With a political transition secured, South Africa is now having to navigate changing global dynamics: namely the end of unconventional monetary policy and expected interest rate rises, particularly in the US. As in many emerging markets, the quest for yield benefited South Africa. “When the US embarked on unconventional monetary policy we had an appreciation of the rand, which was driven by massive capital inflows into South Africa,” says Mr Kganyago.
The global recovery is, of course, beneficial to South Africa. Demand for the country’s exports from Europe – and, increasingly, China – is very important. The unwinding of monetary policy, however, will have tailwinds. “We expect that there would capital outflows [and] the exchange rates would depreciate,” says Mr Kganyago.
Still, the central bank held benchmark rates firm in January (some analysts expect rate cuts later in 2018). The SARB expects inflation to move above 5% towards the end of 2018. “We look at these things as risks to the outlook because if there are pressures building up, monetary policy must respond.”
Higher fuel import costs (South Africa imports 60% to 70% of its energy) and government negotiations to settle the country’s large wage bill are further obstacles to clear. Currently, civil service wages eat up a massive 35% of the budget.
For those concerned about another 2013-style shock as monetary policy changes direction, Mr Kganyago believes South Africa is now in better shape. “At the time [2013], South Africa belonged to a club that we did not like to be in, and the club was called the vulnerable five,” he says, citing the country’s twin deficits and above-target inflation as reasons investors were keen to pull out their money.
Today, he argues, the country’s position is stronger. Inflation remains within range. Both budget and current account deficits, while still high, have dropped, as has household debt. A controversial increase in VAT, the first in 25 years, was announced in the February budget and is expected to help pad it further.
Domestic haven
So while South Africa’s growing debt burden is a concern (it is projected to reach 56% of gross domestic product in 2023), Mr Kganyago argues that South Africa has an additional bulwark against external shocks as it holds a large percentage of its debt domestically. This contrasts with Ghana and Angola, for example, where debt burdens have piled up as their currencies weakened.
Mr Kganyago sees this as an important achievement for South Africa’s policy-makers. “For a long time, from 1998, South Africa invested in developing its domestic capital markets, and those domestic capital markets are deep and liquid so South Africa can fund comfortably in its own currency,” he says.
It is by no means a quick fix, however. “It takes time to develop these things and the credibility of the global investor base, and more importantly cultivating your own domestic investor base,” says Mr Kganyago. “You’ve got to eat your vegetables before you can be offered dessert, so for that to happen you are going to have to prepare.” It is an attitude that could be said to reflect much of the work he has already done at the central bank.
