South Africa’s central bank Governor Lesetja Kganyago surprised me in this interview in Davos, offering an enlightened approach to the blockchain – the technology which will massively disrupt financial services. Kganyago also shares the SA Reserve Bank’s approach to the Bankorp lifeboat loan, bats away questions on the Gupta court challenge against SA’s Minister of Finance and shares his encouragement on the way the young democracy’s institutions have held up against strong attacks. – Alec Hogg
The Governor of the Reserve Bank, Lesetja Kganyago is a veteran of these events. You must have been to numerous over the years.
No, I’ve only been to three; this is my third one.
Did they keep you when at the Department of Finance?
I did the Africa one because remember when I was in the Treasury, this takes place in January. If you are Director General of the Treasury, the last thing you want is to be away from the office for a week in January because there is the budget in February, so you don’t see the Director General of the Treasury here; he’s busy with the budget.
No, that makes a lot of sense, but on the other hand, it is a place where you get to meet a lot of people and talk about the past. It was interesting, at dinner the other night that you and Trevor Manuel (your former boss), were reminding us that South Africa actually ran a budget surplus not that long ago.
Yes, that was 2006 and 2007. The past is useful to go into, but one of the things that is the most useful coming into the meeting, to me personally, is to pick up on the new trends that are emerging globally. Three to four years ago, nobody was talking about this Fourth Industrial Revolution, but everybody knew about robots and so forth, but nobody has crystallised this thing into this Fourth Industrial Revolution. The second thing is that this is the World Economic Forum, so it talks about the global economy and for a long time we have spoken about how do we grow the economy and so forth.
Today people are talking about inclusive growth, inclusive globalisation and how do we make globalisation work for everybody and not just for a few and in that regard, I mean you think of it, that South Africa in 2005 and 2006 came with a growth strategy called accelerated and shared growth initiative. That sharing, that had to talk to inclusivity, so in a way, you will say that we were a bit ahead of our time, the term that is now used is inclusive growth and the fourth has to do with what is called Fintech. What are the chances, who thought that technology companies could disrupt banks, which basically is saying that banking models are going to change.
Are banks going to take these things lying down? What are you are seeing around the world, is that banks are going out and snipping, buying up these Fintech companies. Some banks are trying to build from the beginning, others buy Fintech companies and use that and build up, so coming here and picking up all of these trends becomes useful because from a public policy perspective, you have to be asking yourself, is policy keeping up or is it lagging behind the trends and as you come up with plans for the countries, you ask yourself, are you planning for the past or are you planning for the future because if you’re planning for the future, you have to be aware of all of these trends that are emerging.
The one thing that is emerging now is Blockchain and talking to various people here, they say it’s only going to get higher on the agenda. The South African Reserve Bank has been doing a lot of work in this area, it’s not like you’ve been sitting on your hands.
Yes, we have been doing work and the thing about Blockchain, which I think for the benefit of South Africans, people think Blockchain and they think bitcoin, say that bitcoin is based on a technology and the technology is Blockchain and this technology has immense opportunity and for public policy makers, it’s to be looking at this technology and say, “What is it most likely to be used for?” I mean this technology has the potential of bringing in millions of people who are currently excluded from economic activity. It has the potential of automating so many government processes and makes the delivery of services by governments super-efficient. People think that it’s in its early days, but it is already being used in so many different respects.
So what we have had in South Africa, has been an industry-wide group that includes the technology companies, the banking sector and the Central Bank and say; “What are the benefits of this technology, what has to be done?” and one of the things with all the technologies that emerge is that at some stage you need to set standards, because if you don’t set standards then the benefits of the technology are lost the and emerging trend is that people are creating what they call sandboxes and I said, “What’s a sandbox?” Well, the South African equivalent is a sandpit. Basically you create the thing and say, “Go and play there, let’s see what you can come up with”. That’s what central banks are doing now, creating an opportunity for the tech sector and for the banking sector to go and innovate, test things and then come to the Central Bank and point out the constraints that we are facing in the system.
That’s a very enlightened approach that you’re taking, you’re enthusiastic about Blockchain, whereas the status quo is usually concerned and nervous of change.
Well, it’s moving fast. I mean the Bank of England has a couple of these sandboxes, the Monetary Authority of Singapore one of the leading rings and a number of central banks are basically embracing the technology and saying, “You have to engage with the technology and if there are risks in the technology, your duty as public policy makers is to then say, how do we mitigate these risks?” South Africa is very good at structuring national conversations and the conversations between the tax sector, the banking sector, and the regulators is actually a very useful conversation that is taking place.
That advantage, that ability to collaborate, that ability to get around a table and talk has been absent for a while, but it does seem to be coming back into its own.
It has come back, it has been absent for a while. I mean it’s one of South Africa’s biggest strengths. How we have not leveraged on it, or why we took a break from it, is another matter, suffice to say that we see that being brought back and being utilised quite effectively.
With practical consequences, yesterday talking to Stephen Koseff, he gave us some insights into what is happening in those presidential committees or groupings where a million youth are now going to be employed as a deputy president told us, R1.5bn has been raised for job creation by Adrian Gore and so on, so this is really a good news story that we’re not hearing in South Africa.
Well, you know I mean the line that must have been overused the most is “We have a good story to tell”, but as South Africans, our strength is that we are able to set a goal, come together, have a conversation and set the path to go there. Is it something that we seem to have taken a break from for some time, but we seem to have embraced it with much enthusiasm last year and it seems that it would soon bear fruit. One of the things that you have to look at, Alec is this yellow book that we have been distributing here in Davos, which spells out what we have been able to achieve. We are communicating her in Davos. That yellow book would be very useful for South Africans to actually know what it is that has been done over the past 12 months or so.
All the good news stories and in fact, I remember somebody saying they wrote down their own good news stories and got to over a thousand and had to stop then.
Well, I would not be surprised, I mean the bottom line is that South Africa is a credible investment proposition and that is what we have been carrying out here. Yes, we are open for business, but more importantly, South Africa is quite a viable investment proposition.
A functioning constitutional democracy that’s going through the fire and well, we’re coming out the other end, but you guys are going through the fire again at the Reserve Bank over an old story, the lifeboat that was given to Bankorp in the eighties after it got into a lot of trouble. It is many years before you were running the bank, but is there any clarity you can give us on what’s going on there?
Although, we don’t feel as though we’re under the fire and just to put it in perspective, in 1985 I was only in my second year at university.
Don’t blame you.
So we can go back, we had to go back and dig out information and all the governors from Chris Stals to Tito Mboweni, to Gill Marcus, had all corroborated with us recollecting to search for these documents and one of the things that is striking is that there’s a wealth of documents and information from the Tollgate Enquiry, which people do not seem to have been aware of. There was the Jules Braud Enquiry; there was the Dennis Davis Enquiry, now the Public Protector Enquiry. We have received the provisional report and we have a duty, in terms of the constitution to assist the Public Protector in his or her duties.
From our reading of the report, there are factual errors which can easily be corrected if the Public Protector had paid attention to particular documents which we would point to her and then hopefully, then once you have seen these documents, you would probably arrive at a different decision to the one that she probably would have arrived and until the final report is availed, we will not be commenting on the detail of the report.
When you talk about the fire, the other issue of course is the battle that’s going on in the banking sector. This is your remit, the Reserve Bank looks after the banks, you get Abil in trouble, and everyone comes to the Reserve Bank to help fix it. Aren’t you a little disturbed about the way that the Guptas are now attacking, in the courts, the various commercial banks in South Africa?
Well, again the matter is sub judice, it’s been set for hearing in March. Bear in mind it’s not the Guptas who went to court, it is the Minister of Finance who went to court and said, “I cannot intervene here based on the legislation that we have”.
No, but the Guptas are now suing the banks, that’s the next step.
I haven’t seen that. What I’m saying is that the Minister of Finance was the first one to go to the court and say, “I have been asked” because he has been asked to intervene, “I cannot intervene”, which is why we are in the courts and I think that hearing has been set for the 27 to the 29th of March.
The courts are serving this young democracy very well.
It’s not just the courts; it’s the institutions of our democracy, of which the courts are a very important one. You could see, you know last year we had very credible elections, we have had credible elections over years, administered by the Independent Electoral Commission, smooth transition from one governing party to another governing party in local government, we have a functioning democracy. You have a Central Bank which has been tasked with the responsibility of protecting the value of the currency and I can say to you now, “No politician past or present had ever tried to put pressure on the bank to do things in a particular way”.
We have been given the space to act independently in terms of the constitution and you can go on and say that those institutions of our democracy are functioning, they are functioning well, and these institutions are only as good as South Africans themselves are giving the institutions, we as South Africans, these are our institutions that have been created by our constitution which is basically a contract amongst the South Africans, we have to protect those institutions because they have served us so well.
Almost getting to the end now, but the value of the Rand, which his part of your remit as well, when you have this huge volatility or these huge changes, do you have to bite your fingernails or do you just say, I’ve seen this before, this too shall pass?
Not only have we seen it before, remember the constitution says we must protect the value of the currency in the republic, which basically means it’s not talking about the exchange rate, it’s talking about what the Rand can buy in South Africa taken to its logical conclusion, we have to make sure that the purchasing power of the Rand does not get eroded by rising inflation.
So you would not engage in the kind of protection of the currency value, as happened, it was in 1998 and we lost R20bn in foolhardy…
We failed dismally, or as I would rather like to put it, it was a very expensive lesson on how the foreign exchange markets work.
However, we’ve learnt and we’re not going to repeat it.
What are you taking home from Davos this year?
One is that I actually think we were able to put the South African investment proposition across. The mood with respect to South Africa this year is far more positive than what we had seen in the previous year. As I said, I had attended these meetings three times and last year was particularly difficult. The second takeaway is that we are going to have a lot of policy uncertainty in the advanced economies and that is driven by politics in the advanced economies, whether you are looking at the US and you are looking at a number of European countries that would be facing elections and that is leading to a lot of policy uncertainty.
We do not know what the US policy is going to be with respect to trade, with respect to foreign direct investment because they are saying that they want to keep jobs at home. There’s talk of a fiscal stimulus in the US, what would that mean for the US economy, what would it mean for the global economy and how would it affect the South African economy? The third issue that I thought is a takeaway is that for the first time we had a clause, where the presentations of the World Economic outlook, we had a situation where growth was not revised downwards and was kept the same.
So I’m saying (it is a point I’ve been making for the South Africans to say 2017 for South Africans will be better than 2016 and part of it has to do with an improved global environment and the concrete steps that we had taken after we had structured a national conversation in terms of what we should be doing with the South African economy.
Well, the dawn is starting to break after a very difficult period, the Governor of the Reserve Bank Lesetja Kganyago, our special guest today and this special podcast is brought to you by BrightRock.