Like apples, with interviewees the first bite is often the best. Today on CNBC Africa’s Power Lunch we got our first interview opportunity with the newly appointed SA Reserve Bank Governor Lesetja Kganyago. It’s been my privilege to engage many times with the Governor-in-waiting while he was Director General at the Department of Finance. He never disappointed. Neither did he do so today. In this interview we explored various aspects of his work, his philosophies and how the SARB might adjust to new leadership. When he left the studio, I felt comfortable that we are in good hands. Not just Kganyago’s but through the cohesion with Treasury, the Finance Ministry, and, indeed, the close network this SARB Governor has within the international central banking community. Watch the video (or read the transcript) and you’ll likely end up feeling the same. More relaxed than before. The market is delighted at Kganyago’s appointment. Rightly so. – AH
ALEC HOGG: South Africa’s Rand firmed yesterday morning after news that President Jacob Zuma had appointed Lesetja Kganyago as South Africa’s new Reserve Bank Governor. He takes over on the 9th of November. The Governor-Designate is in the studio. Happy birthday. You’re 49 years old today.
LESETJA KGANYAGO: Thank you very much.
ALEC HOGG: You and Desmond Tutu.
LESETJA KGANYAGO: Getting younger.
ALEC HOGG: Indeed. A wonderful way for you to celebrate your appointment yesterday. It wasn’t a surprise to us, but it was a relief. Did you know that you’d been tapped for this post?
LESETJA KGANYAGO: Not until very late. I guess it was also a relief for us in the Bank because everywhere we went, we were being asked the question ‘when is the appointment being made’. It is nevertheless, something we welcome with both hands.
ALEC HOGG: The interesting thing was that you did work at the Reserve Bank years ago, before you joined Treasury. Is that a bit of a dream come true?
LESETJA KGANYAGO: Well, I never in my wildest dreams thought I’d end up being a Governor of the Reserve Bank when I was first at the bank in 1996. I left the bank because I needed to work on policy. In particular, I needed to work on debt management policy, which was a research project of my Master’s degree, so I went to the Treasury. Initially, when I went to the Treasury, I thought I would be there for a few years and then probably apply for a senior position in the Bank. It was not to be. I rose fast in the Treasury and then the President approached me in late 2010, and said ‘we would like you to go to the Reserve Bank as the Deputy Governor’. I thought ‘well, Central Banking – I can do it’, and so I went to the bank and as far as I was concerned, I was busy minding my business. My contract was due to expire in 2016 when I got the call from the President saying ‘we would like you to take over from Ms Marcus’.
ALEC HOGG: It’s an interesting appointment and I think the market could be weighing heavily on you. Your two predecessors both came with different backgrounds. You’re from the London School of Economics and Harvard. You have all the background. You’ve had all the right preparation for this position. Are you a little worried about that? The market almost felt with your two predecessors that as long as they didn’t botch anything, it was fine. With you, they’re going to be looking for more.
LESETJA KGANYAGO: I’m not sure what the ‘more’ is that they would be looking for. For me, the interesting thing is that the best training ground for this job was the time I had spent in the Treasury. That’s where I honed my skills in financial markets because I had actual financial markets experience. Secondly, being responsible for financial markets policy also became crucial. In addition, the job entailed me having to communicate policy to investors. When you meet investors, you do not say I am the Director-General of Treasury so I cannot talk about education and I cannot talk about social issues. This brought perspective. As the bank itself is concerned, Ms Marcus had laid a very solid basis for us. It will continue on that basis and I think more importantly, her approach to society was a very interesting one. She had used a range of outreach programs with industry bodies, with the trade union movement, with the state-owned enterprises, and she would meet with the editors twice yearly. It took the transparency of monetary policy to the next level.
ALEC HOGG: She’s been a fabulous governor, as was Tito Mboweni before her. Everybody is looking to you to be the Bernanke or the Greenspan of Africa. Who’s your hero among Central Bank Governors?
LESETJA KGANYAGO: That would be a difficult one because every one of the Central Bank Governors dealt with completely different economies. In most instances, you come in, you are in charge, the business cycle is completely different, and you end up having to respond completely differently. The people I actually look up to are outside the realm of Central Banking. I look beyond, but I look at leadership much more broadly and quite frankly, with respect to all of those people you mentioned who had come before us; they were also in a very different era.
We are now in an era where Central Banking has actually changed significantly.
Central Banks now have to worry about financial stability, which is something that they didn’t worry about before. The Reserve Bank had its financial stability department, for a long time. It is only in the past three years that we were given an explicit financial stability mandate.
ALEC HOGG: Mark Carney (Bank of England Governor), is he a friend of yours from London? I ask this because I know you and Trevor Manuel were very close at Treasury and he knows Trevor well……
LESETJA KGANYAGO: Not from London.
ALEC HOGG: From the Canadian time?
LESETJA KGANYAGO: Well, interestingly, not from the Canadian time either but from the South African time. Mark Carney was an advisor to the Treasury on Capital Markets. Rather, he was working for a bank and at the time when we had to access Capital Markets, he had to, almost shepherd us through the Financial Markets, including guiding us through the rating agency process etcetera. Surprisingly, the next time I met him, he was in the Canadian Treasury – not even the Canadian Central Bank – before he moved back into the Canadian Central Bank (and then Governor of the Bank of England).
ALEC HOGG: So it’s a small, tight group of the Central Bankers around the world who know each other.
LESETJA KGANYAGO: Well, Central Bankers meet every two months, so we’ve gotten to know each other – every two months, in Basel. In addition to that, there are the G20 Ministers and Governors’ meetings. There are meetings of the Financial Stability Board. Then there are the IMF World Bank meetings, so you get to know each other, but I think that where Central Bankers talk honestly to each other is when they are in BIS meetings.
ALEC HOGG: Lesetja, it was very interesting watching your presentation yesterday on live television where you referred to the Constitution. Just elaborate a little bit on what you said yesterday – that your job is to protect the exchange rate within the context of balanced growth. What did you mean by that?
LESETJA KGANYAGO: It’s not to protect the exchange rate. It’s to protect the value of the currency. It’s a very important distinction and I’m glad you raised it. If anyone looked at what the Reserve Bank used to say in the early 90’s before the adoption of the Constitution of South Africa, the Reserve Bank used to talk about protecting the external and internal value of the currency. The external was being defined as the exchange rate and the internal was defined as maintaining price stability. What the Constitution did say is that it does protect the value of the currency and the interpretation was a very clear one.
We must protect what the Rand in your pocket can buy and protecting what the Rand in your pocket can buy means that we have to keep inflation in check.
If prices rise faster that means it erodes the buying power of the Rand in your pocket and the people most vulnerable are actually the poor, because they do not have a means of protecting themselves against inflation. The Constitution is also very clear, though. It says the things the Reserve Bank does in protecting the value of the currency, must do, in the interest of balanced and sustainable growth in the Republic.
ALEC HOGG: And your relationship with Nhlanhla Nene, the Finance Minister… Again, from your very warm embraces yesterday, it seems to be pretty close.
LESETJA KGANYAGO: It’s very close. I’ve known the Minister from the time when he was an ordinary member of Parliament’s Portfolio Committee on Finance. He later became the Chair of that Portfolio Committee on Finance. He was a very tough taskmaster. When we had to go to Parliament to table our strategic plans and table the annual report, he was chairing. There we had to present the budget and the budget policy statement. He was chairing the portfolio committee on finance. When he was appointed Deputy Minister of Finance, it was ‘welcome to the Treasury family’ and we were personally very pleased, as well when he was appointed Minister of Finance. He’s always on top of the issues, but he’s also a very likeable person, very accessible.
I meant it when I said (to the Finance Minister) ‘I know where you stay. The Constitution says we must coordinate. The Constitution says there must be regular consultation between you and the bank. I know where you stay. I will come and find you and make sure that consultation takes place’.
ALEC HOGG: What kind of consultation are you talking about? The Reserve Bank has been pretty stinging in some of its criticism on things like Government caving in to trade union pricing pressure and into administered prices, etcetera.
LESETJA KGANYAGO: You know, I think it was around 2001, when the Governor of the Reserve Bank then, Tito Mboweni and the Minister of Finance, Trevor Manuel decided that to give effect to that consultation we need to almost, institutionalise the consultation. They then established three standing committees between the bank and the Treasury, which is where the actual rubber hits the road. One important committee – there are three – but the most important one is the Macroeconomic Standing Committee. That is where they then engage with each other to say ‘what is it that you see as strengths, etcetera’. The discussions are very sharp, as you could expect. The debates are, at times, very animated.
You would think that we would not be able to arrive at any consensus, but we eventually come around and agree on what posture to take.
That is the beauty of it. Macroeconomic policy is easy to coordinate because there are only two institutions of macroeconomic policy – the Treasury and the Reserve Bank. When you get into the realm of the others – macroeconomic reform and structural reform: that becomes a complex political process.
ALEC HOGG: What’s the bank going to be like under your leadership, particularly the Monetary Policy Committee? We’ve seen some very close calls between the Hawks and the Doves on interest rates, in particular. Which side are you on and which side is Gill Marcus on? Are we now going to have more Doves or Hawks?
LESETJA KGANYAGO: The interesting thing is that I don’t know where this thing of Doves and Hawks was invented. Maybe there might be another bet in between called a Dawk, which has the beak of a Dove and the nails of a Hawk. I don’t think it’s a very useful characterisation because in arriving at the monetary policy stance, you actually look at what the figures are telling you. You look at high frequency data. You model. You forecast. You make assumptions and most of the time by the way, it is in the process of making assumptions that the thing ceases to become a science and becomes more of a judgment thing. You can have very sophisticated models. They are never going to replace professional judgment and that is what you would face.
ALEC HOGG: It’s been close, the voting on rate increases…
LESETJA KGANYAGO: And that’s healthy because it suggests that there isn’t a ‘head’ mentality of the MPC, that there is a robust debate, and that at times, you would have a split decision. There was a time when all decisions were unanimous and maybe that was because the data at the time suggested that what the stance should be was clear for everybody. I think it is very important that people understand there are very robust debates that take place in the MPC. It’s a very collegial discussion. For me, probably one of the most rewarding things in the Central Bank is to be a member of the Monetary Policy Committee.
ALEC HOGG: Do you guys talk for two whole days? That’s what we’re told.
LESETJA KGANYAGO: Of course. What would we be sitting there, doing?
ALEC HOGG: You go through all the data.
LESETJA KGANYAGO: You said ‘talk’. We actually debate that for two whole days. The way in which it works is that we spend the first two days actually having presentations from staff from various areas of research, from balance of payments to the real economy, to money and banking statistics. We go through the entire South African economy and locate it in the context of the global economy, check what the global trends, take a break, and the members of the Monetary Policy Committee will then go into a committee and that is where you must now express your view.
ALEC HOGG: One final point. The ratings agencies have been pretty harsh on South Africa lately – downgrading our banks. The Reserve Bank came out with a very strong statement over Capitec. Are you going to be talking to them more, perhaps engaging with them more so that we can get a more balanced outlook?
LESETJA KGANYAGO: We have always been engaged with the rating agencies. They visit a number of times. When we are overseas, we also do talks with them. What you would recall from that announcement on the South African banking industry sounded like shouting ‘fire’ in a crowded hall because here, we were busy with a resolution and then they came with a general downgrade of the South African banks. What South Africans might not be aware of, is that even after that downgrade the South African banks are still rated pretty high on a global scale.
ALEC HOGG: Lesetja Kganyago, congratulations again on your appointment as Reserve Bank Governor. Happy birthday. You made it before you go to 50, and we look forward to seeing you in this studio and watching your MPC discussions for many, many years into the future. Perhaps you will become the Bernanke, but certainly not the Janet Yellen of African banking.
LESETJA KGANYAGO: Thank you very much, Alec.
