Kganyago: SA will need more than a new finmin to dodge junk

JOHANNESBURG — Globally respected SARB Governor, Lesetja Kganyago, was interviewed by Bloomberg TV stars Francine Lacqua and Tom Keene on Thursday. And the interview didn’t disappoint. Kganyago was frank on where South Africa is right now and illustrated how the country still has top technocrats despite the challenging Zupta years. Below is a video of the interview. – Gareth van Zyl

By Francine Lacqua and Tom Keene

(Bloomberg) – South Africa’s new political leadership under President Cyril Ramaphosa sets a solid and credible policy trajectory, Reserve Bank Governor Lesetja Kganyago said.

“South Africans couldn’t have hoped for a better leader than the president we have now,” Kganyago said in an interview with Bloomberg TV in London on Thursday. “He is a serious constitutionalist, he understands the importance of the rule of law, having been at forefront of drafting the constitution.”

Investor confidence started creeping back after the ruling African National Congress elected Ramaphosa as its new leader in December, paving the way for him to take over from Jacob Zuma when he resigned as the country’s president last month. Ramaphosa announced changes to the cabinet this week, including reappointing Nhlanhla Nene as finance minister, the position Zuma fired him from in 2015, a move that triggered a sell-off in the rand and bonds.

South Africa’s foreign- and local-currency credit ratings dropped to non-investment grade last year as Fitch Ratings Ltd. and S&P Global Ratings lowered their assessments, citing policy uncertainty and concerns about the management and finances of state-owned companies.

While Nene brings credibility to the Treasury, it “will take more than the finance minister” to avoid another junk credit rating, Kganyago said. Moody’s Investors Services has South Africa on review for a downgrade and may make an announcement on March 23.

“The future of South Africa’s credit rating is in the hands of the policymakers,” Kganyago said.

The rand has advanced 8.7 percent since Ramaphosa was elected as ANC leader.

“The move on the rand starting in December was a welcome correction, pricing in the prospect of a changing political leadership,” Kganyago said.

Full transcript of SARB governor Lesetja Kganyago interview on Bloomberg

A lot of work to be done but you’ve already done some great work, which is why you’re receiving this award. We had you on Bloomberg in Davos and at the time, you were saying that you were pretty confident that if there was a new president, if there was corruption being tackled, then credit agencies would stay away from downgrading SA. We saw a lot of political machinations, new appointments, a new President, and a new Finance Minister. Are you confident that that’s enough to keep the credit agencies away?

We’re very confident that this will take SA forward so whether it stamps out the possible credit rating downgrade or it doesn’t, it’s not the real issue. What is important is that SA is taking decisive steps to correct the shortcomings that we have had. I think that getting into the new year we had political uncertainty. We were not sure what kind of political leadership will emerge out of the conference of the governing party. We were not very clear about the policy trajectory that leadership would actually take. We now know who that leadership is. You say, ‘a new Minister of Finance.’ He’s not a new Minister of Finance. He has come back. He’s brought back his credibility to bear and I think that we are on a very good wicket.

Lesetja Kganyago gestures as he speaks during a Bloomberg Television interview on day two of the World Economic Forum in Davos, Switzerland. Photographer: Simon Dawson/Bloomberg

Okay, but is his credibility enough so that Moody’s doesn’t…? Can you avoid a junk rating by Moody’s at the end of the month, thanks to your new Finance Minister?

Well, it’s going to take more than the Finance Minister. As I have previously said that the future of SA’s credit rating is in the hands of SA policy makers. Appointing a new Minister of Finance that brings credibility to the process is one thing. What does the policy trajectory look like? It’s just over a week ago that the Minister of Finance tabled a Budget in the National Assembly. It was a very credible budget, very bold that set down the path for fiscal consolidation and put on the table some decisions, which might be politically unpopular but are absolutely the correct things to do, in order to set the SA economy back on a better trajectory.

Governor, let me show you, your favourite chart right now. This is the strong Rand folks and it’s really testament of how better, and the anticipation of a better SA. Since November last year, the picture is a stronger Rand and really great optimism of print of under 12:1 on the Dollar/Rand. Governor, what can you do for big business? Francine and I spoke with the leadership of De Beers a few days ago. What does the Central Bank need to do to assist big business towards a more stable SA?

Well our contribution to a stable SA has to resonate with our mandate, and I think that our job and what we can do for the business community is made so much easier now because we have got a political leadership that had set a very solid policy trajectory that we believe is credible. I think that you were speaking to the leadership of De Beers. De Beers is a mining house and if you were to ask them, they will tell you that they want policy certainty with respect to mineral policy in SA. We’ve just had a new Minister of Mineral Resources with extensive knowledge of the mining industry. He’s worked in the mining industry for decades and he’s made it very clear that he wants to put that certainty within the next 3-months. He wants to clear the chart so that SA businesses can have investment growing once again.

An employee holds South African Rand notes in this arranged photograph in London, U.K. Photographer: Jason Alden/Bloomberg

Governor, given the chart that Tom was just showing the Rand’s big gains and its impact on the inflation outlook. Does it create room for more easing of interest rates?

We have walked this trip before, Francine, and when then Rand weakened you asked the question in the other direction.

Of course.

You asked if the Rand has weakened, does this mean that interest rates are going to go up, and the message is the same. The movement of the currency does fit into inflation and what we watch is whether the Rand now has strengthened. What would the second-round effects be from a strong Rand? To the extent that the Rand would sustain a lower inflation path than it gives scope for monetary policy to say, with the kind of inflation outlook that we have then we can adjust policy. It just works the other way if the Rand were to have gone in the opposite direction. We would once again say, can we see what the pass-through effects are?

But Governor, from the level of the Rand now, do you see it strengthening further?

Well, it’s difficult to say. Suffice to say that the move on the Rand, starting in December 2017, was a welcome correction. It was a correction that was trying to price in the prospects of a change in political leadership. It was taking cognisance of the fundamentals that SA, which was seen as vulnerable, which had a current account deficit of around 6% of GDP. Now it has a current account deficit of 2.3% that we had throughout 2016. Inflation that was outside of the target range. It is now firmly within the target range. That SA now has a positive net-international investment position. What was really dragging sentiment in SA was the political uncertainty, and with that behind us it gives us South Africans an opportunity to get working. I think that the kinds of tone that had been set by the President is actually very positive in respect of sentiment.

You see, Tom, you were avoiding the Rand currency strengthening question.

Well, he was very delicate about that. Governor, very quickly here, your independence within SA, I think of your nation and all of global Wall Street would like to know how SA, in this troubled ANC Party, the two sides of it, how they re-instituted, reaffirmed the rule of law in SA, and move away from the timeless corruption that is in so many nations. How does SA get to a better rule of law?

Well, South Africans couldn’t have hoped for a better leader than the president we are having now. He is the President who steered the drafting of SA’s Constitution. He is a serious Constitutionalist, he understands the importance of the rule of law having been at the forefront of the drafting of those rules, and our Constitution has got those built-in checks and balances, and I think as I have said before on this channel, that the strength of SA lies in the institutions of its democracy. Those institutions have been undermined before. Many of the institutions have fought back to reclaim their Constitutional space and we can see the results of reclaiming that Constitutional space. The Central Bank having been one, which had come itself under significant attack. We had to fight back with all the means at our disposal. We used the law to fight for our independent space – we won that space. We also took that battle to the Court of Public Opinion, and I think that South Africans have now thrown their weight behind the Central Bank.

Governor, given all these changes, would you consider going back to the National Treasury if asked by President Ramaphosa, or even the Finance Ministry? You worked there many years before you joined the Central Bank?

I have done 15 and a half years at the National Treasury. The most senior technical job you can do at the National Treasury is that of the Director-General of National Treasury. I don’t think I would like to do that again. I’ve gone on record to say that the biggest honour that a country could give any of it’s sons or daughters is to ask them to be the Governor of the Central Bank. There is no need for me to go to the Treasury, and I am not a politician either so I will not consider a political area. I am a technocrate.