Tito Mboweni: Why SA needs to fight ‘junk’ status with all we’ve got

I met Tito Mboweni when he was a member of the ANC’s pre-1994 Economic Planning Committee. He shared cramped space in then Shell House with Max Sisulu and Trevor Manuel and, as was the ANC’s way, insisted on being called by his first name. It was a time when I had recently joined the national broadcaster after it became clear the Old Guard was relinquishing its hold. So, as the SABC’s economics editor, it was my privilege to introduce Mboweni (and many of his colleagues) on television to a nervous establishment. He didn’t make it easy. I well remember one night when Tito shocked fellow guest, the late Flip Meyer, by asserting the first thing an ANC Government would do was nationalise JSE-listed Iscor (now ArcelorMittal SA). His thinking has come full circle since. Mboweni served as the labour minister in Mandela’s cabinet and attracted criticism – mine included – when becoming a “political appointment” at the SA Reserve Bank. But once in that critical role, was independence personified, showing economic maturity and a deep understanding of complex issues, serving his country with well. Since leaving the Governorship, Mboweni has kicked on, playing a vital behind-the-scenes role in deflecting some of his ANC colleagues’ crazy ideas. He occasionally goes public, like this week at Wits University. When that happens, Tito’s perspectives are well worth absorbing. Here’s the speech in full. – Alec Hogg  

From Wits University (Tito Mboweni’s speech follows):

Former Reserve Bank Governor, Mr Tito Mboweni says South Africa needs an “immediate defence mechanism” to avoid being awarded a “junk” rating by international credit ranking agencies.

Speaking at the Wits graduation ceremony of the Faculty of Commerce, Law and Management on Tuesday morning, Mboweni warned that “a dark cloud, mist or fog is gathering upon us as a country”.

CAPE TOWNSOUTH AFRICA, 04MAY11 - Tito Mboweni, Chairman, AngloGold Ashanti, south Africa, during the Lessons from the New Champions session at the World Economic Forum on Africa 2011 held in Cape Town, South Africa, 4-6 May 2011. Copyright (cc-by-sa) © World Economic Forum (www.weforum.org/Photo Eric Miller emiller@iafrica.com

“We have just become one notch above junk status. We cannot afford to become junk status,” said Mboweni.

“Junk status as we know translates automatically to cost of borrowing, re-ordering of corporates on the investor’s horizon within his or her rules or within certain indices like the MSCI. The immediate defense mechanism is based on three pillars: a credible fiscal stance (we dare not deviate from the Budget stance we adopted in October, please!); re-enforce central bank independence (I know this is intangible, but let’s do it!); and finally, respect for all other independent institutions (the judiciary and chapter nine institutions).”

Mboweni said South Africa also has to demonstrate it is serious about economic growth and taking serious steps to propel it.

Read also: This is SA’s future: What Friday’s double credit rating downgrade means

Mboweni served as the South African Reserve Bank Governor from 1999 to 2009, and as the Minister of Labour in former President Nelson Mandela’s Cabinet. He is also a member of the National Executive Committee (NEC) of the ANC and serves as a non-executive director of the new Development Bank (Brics Bank). He joined Wits in August this year as an honorary professor at the School of Economic and Business Sciences.

Former Reserve Bank Governor Tito Mboweni’s Wits Graduation Speech



Mr Vice-Chancellor,

The Dean of the Faculty of Commerce, Law and Management

President of the Students Representative Council,

Academic and non-academic staff

Graduands, diplomats and your friends

Parents and the entire university community here present.

It is probably trite to say this was a very difficult year. This university, like most universities in South Africa, experienced one of the longest student protests in years. The WitsFeesMustFall campaign captured the attention of this country and the world for a number of weeks. Suddenly, the struggle mood of many people was uplifted or re-awakened and reminded all of us that the journey to our intermediate destination is still very long.

As President Mandela would have said, “I have walked that long road to freedom. I have tried not to falter; I have made missteps along the way. But I have discovered the secret that after climbing a great hill, one only finds that there are many more hills to climb. I have taken a moment here to rest, to steal a view of the glorious vista that surrounds me, to look back on the distance I have come. But I can only rest for a moment, for with freedom come responsibilities, and I dare not linger, for my long walk is not yet ended”. (Page 617, Long Walk to Freedom, Nelson Mandela, 1994, Macdonald Purnell).

Read also: This is the future: SA debt falling to junk status just a matter of time

Some might argue that maybe we ‘lingered’ for too long on the issue of university fees. Our youth reminded us of the Freedom Charter. It says under the heading The Doors of Learning and Culture Shall be Opened, “Education shall be free, compulsory, universal and equal for all children; Higher education and technical training shall be opened to all by means of state allowances and scholarships awarded on the basis of merit”.

The primary objective of central banks over many years was understood and internalised as the pursuit of price stability. Price stability being defined as a sustained period of low inflation with the accompanying benefits of economic growth at or near potential and low or full employment.  For many years, central bankers drove this message home via effective communications and monetary policy actions. The legendary Paul Volker led the central banking troops on this journey and was enthusiastically accompanied by many notable governors of central banks and their esteemed colleagues. This became, for many years, central banking 101.

Things began to change when in the late 1990s and early 2000; the central bank of Japan broke ranks and began to implement a strange sort of monetary policy. They referred to this as QUANTITATIVE EASING (QE). I recall the meetings of the shareholding central banks in Basel, at the Bank for International Settlements (BIS), where we all looked at the Japanese with suspicion, as if saying, “What’s wrong with these Japanese?” You see, as we all know, the Japanese economy had experienced a prolonged period of negative inflation and no growth. QE was meant to, in lay people’s language, pump money into the economy to get it moving. In fact the Japanese wanted to see some inflation in their economy. It still has not happened. Then when the global financial crisis hit us in 2007/2008, the unthinkable in central banking happened. The US Federal Reserve Bank (the Fed), the Bank of England (BoE) and the European Central Bank (ECB) adopted the QE approach to central banking.  “The genie was out of the bottle” as Prof Charles Goodhart, one of my former central banking colleagues from the BoE has said. (Professor Goodhart is also famously known for a number of “laws” in economics named after him. Amongst others the following: “when a measure becomes a target, it ceases to be a good measure” and “ As soon as a government attempts to regulate any sets of financial assets, these become unreliable as indicators of economic trends”).

From this point onwards, in my view and on reflection, inflation targeting as the primary focus of central banks was dead. We did not kill it; it just walked away from us just like M3 had done before. It has become more and clearer to me that central banks cannot have a PRIMARY OBJECTIVE but have to explain in detail and clearly what is it that they do. Of late, central banks have been found wanting as far as clear communication is concerned. The situation can be improved.

Read also: Kevin Lings: Fitch downgrade expected, outlook stable. Window of opportunity

From my experience at the South African Reserve Bank, it is clear to me now that the “genie is out of the bottle”, central banks should make it clear that they have many functions but they prioritise FINACIAL STABILITY ( the stability of the banking and related sectors or sub-sectors) and the NATIONAL PAYMENTS SYSTEM. These two functions are, in my reflection, very central to central banking. The emerging regulatory framework in South Africa, the so-called Twin Peaks Model, is well suited for this approach and I support it despite my reservations about the possible pollution of the central bank from non-central banking issues. But my concerns are contradictory because they are in actual fact supportive of my view that the primary function of central banks can no longer be price stability but financial and payments system stability. This in a very strange way, takes us back to what my predecessor, Dr Chris Stals used to refer to as the “ECLECTIC APPROACH TO CENTRAL BANKING”.  Maybe he was correct.

It seems that nobody in South Africa, except Ministers Rob Davies and Ibrahim Patel would love to live in a country with a weaker exchange rate of the Rand. I suspect that even those two gentlemen would not want to see our exchange rate at these levels for long. And the myth they (these two ministers) have been peddling around that the weaker exchange rate would be the saviour of the manufacturing sector has been exposed as being both theoretically and empirically weak. An exchange rate cannot be a proxy for industrial policy. In fact, the policy conflicts in our government needs to be sorted out. Better coordination and leadership is required. Let me give you an example of confusion around industrial policy. The Department of Trade and Industry (DTI) says that they would like to drive the industrialisation of South Africa. Well and good. Do they have a clear policy on the plastics industrial sub-sector? No, they don’t. So, the Department of the Environmental Affairs and Tourism proposes a law which is meant to protect the environment from the littering of plastics throughout the country. Well and good. So they suggest a tax on companies which produce anything plastic. That is industrial policy by the back door. And where is the DTI. Vas geslaap!

Back to the exchange rate. I am in favour of a stable exchange rate at whatever level. The exchange rate, ceteris paribus, is an important automatic stabiliser in any economy with a floating system. But the economics problem we are facing today is that this assumption is not applying. We have conflicting and nationalistic economic policies around the world. The global institutions which are supposed to bring about some form of global coordination of policies are failing us: the G20, the IMF, and the BIS, OECD, etc. Its dog eats dog out there. At the end of the day, the US Fed is going to start raising the federal funds rate. They have already ceased QE. This has already been factored into the market. Long rates are now indicating a Fed Funds Rate increase in December or by March next year.

And here is the thing about the globalised financial markets. Now that they have already priced in a fed funds rate increase, they are trading on the interest differential between South Africa and the US in search of yield. Our central bank is fully aware of this and is watching the US markets very closely and they are doing a good job. So going forward, one should expect the Rand exchange rate to be a bit volatile but will settle at an equilibrium level consistent with the automatic stabiliser role that I spoke about, subject to data and global policies been more clear and certain. I know that this does not bring any comfort to any importer, exporter or those planning a holiday in Bali this December.

Globalisation is a complex phenomenon. There are many costs and benefits to this process. Some countries, like the US, when designing their legislation, are extra-territorial. We don’t like this but we have to live with it until such time that we amass sufficient global influence to change this behaviour. One of the rules which apply in the US, Europe and Japan is that institutions that invest the funds of those who saved must do so prudently. And the basic guidelines and frameworks are done through Ratings Agencies. These institutions which must assess a country or corporate’s quality so as to advise investors whether to invest X amount or not. And they do this through a ratings mechanism.

A dark cloud, mist or fog is gathering upon us as a country. We have just become one notch above junk status. We cannot afford to become junk status. Junk status as we know translates automatically to cost of borrowing, re-ordering of corporates on the investor’s horizon within his or her rules or within certain indices like the MSCI, etc. The immediate defence mechanism is based on three pillars: a credible fiscal stance (we dare not deviate from the Budget stance we adopted in October, please!), re-enforce central bank independence (I know this is intangible, but let’s do it!) and finally, respect for all other independent institutions (the judiciary, chapter nine institutions, etc. Yes, final finally, we have to demonstrate that we are serious about economic growth and taking serious steps to propel it. A number of steps need to be taken to ignite growth. I won’t repeat these here as I spoke about this at some length during  my inaugural lecture at the Department of Business and Economics Sciences. I refer you to that material.

Graduation day is a big day for both undergraduates and post-graduates. I love graduation days and the processions. My hearty congratulations to all of you who are graduating today. You look so awesome in your regalia. With every graduation ceremony, we are adding to the technical and intellectual capacity of our country. This is so much needed. I know that this has been a long walk for you and your families and friends. But as Madiba said, as you celebrate your achievements, ‘you dare not linger for long, for our long walk is not yet ended’.

Congratulations!! Hoyo hoyo!

Thank you for listening to me.

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