The South African Reserve Bank has a responsibility to maintain price stability and look after the economy. Lesetja Kganyago was reappointed by President Cyril Ramaphosa as the Governor of the Reserve Bank for a period of five years, with effect from 9 November 2019. In a webinar hosted by the Cape Town Press Club, the governor addressed the audience in an animated fashion, comparing the current challenges to the economy with a car dodging animals on a highway. – Claire Badenhorst
Risks for rand and other emerging currencies
Lesetja Kganyago, Governor of the Reserve Bank, has set out the risks for the rand at a webinar for the Cape Town Press Club.
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One that we had identified is that global financial conditions could tighten. At the moment, they have loosened and capital continues to flow but they could tighten. Secondly, we are no longer an investment grade country. We have fallen out of important indices like the WGBI, and with that happening, although foreigners are continuing to buy South African bonds and equities – more bonds than equities – because we are no longer investment grade, the kind of flaws that we are attracting are those of a speculative nature. So, they are fickle. So, they come in and come out and that could introduce volatility to the exchange rate.
But as far as we are concerned, if shocks materialise like the comic shock materialised – the currency depreciated – we see that as a shock absorber with the kind of depreciation that we have seen at the advent of Covid and South Africa also falling out of the WGBI. When the currency depreciated to that extent, we would have had serious concerns about what would happen to inflation. We would have expected inflation to would rise.
But like I said, there was also both a demand and a supply shock, and that contained inflation. So, you had a depreciation of the currency and in spite of having a depreciation of the currency, you had a decline in the inflation rate. And if the global economy reopens and we manage to contain inflation, what that could mean is that we would have real competitive gains. But that is provided the same thing does not happen to the other countries.
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Many emerging market countries experienced depreciation of their currencies. So, there was a global realignment exchange rate, and so what we are continuing to monitor is, what are these risks if these risks materialise? Do we have the wherewithal to do this? And the best response for us is a floating exchange rate because it absorbs the shocks on our behalf.
The Reserve Bank Governor indicated that fixing the SA economy doesn’t require a careful rethink. Government just needs to get on with implementing plans.
Monetary policy actions that we have taken are meant to take the economy back towards potential because the economy experienced a shock that deviated it from potential.
“Think of it like you are driving on the highway and you got a scare – an animal crossed and you slowed down. It shocked your speed, and now that the animal has passed, you accelerate back towards the speed limit on the highway.”
At the moment, the South African economy is below its speed limit, and that is why we have taken the kind of actions that we have taken to take it back towards potential. But we have taken all of these steps. The economy was in a standstill. Think of it.
“So, you would like to accelerate your car back to 120km per hour, but for some reason, there are either roadworks or there is a roadblock and you can’t move.”
And in a way, the lockdown kept the car still and even if we add more fuel, with the interest rate cut and all of these things to get the car going, there was a lockdown. The lockdown is relaxed and the car should accelerate back towards potential. That is what you would see.
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So, deciding on what kind of monetary policy stance we take from meeting to meeting is a function, not just of where the economy is relative to its speed limit, but also, what would happen going forward as to whether the economy would be able to get towards that speed limit. You know, you can just paint these plans. RDP to 1994. Gear, 1996. Micro-economic reform, 2001. AsgiSA, 2005. New growth plan, 2009. The national development plan, 2010. Go on. And then what is next? And then you will hear a narrative that says that we need to change. All the plans of the past will not work, we need a new plan.
Excuse me. We didn’t implement any of the plans of the past.
