SARB Governor Lesetja Kganyago: Is SA’s upbeat 2Q GDP flash in the pan?

SARB Governor Lesetja Kganyago‘s once jet black moustache has greyed. And there are a few more lines on his face. But apart from those physical signs, only those who live close to the fire would appreciate the tough ride he has had over the past few years as, first,  Zuptoids tried to grab control of South Africa’s central bank; and then a misguided Public Protector attempted the same. But the vastly experienced Kganyago proved up to the challenge and in this wide-ranging interview with Biznews founder Alec Hogg, he looks back at the pleasantly surprising GDP numbers and ahead at what we need to watch out for next.

I’m with the governor of the South African Reserve Bank – Lesetja Kganyago. Lovely to see you here. How has the WEF been for you this year?

Very busy. I participated in lots of sessions. Interestingly, I did one on financial crime yesterday – which I facilitated – and then I had to attend one on Blockchain and one on fighting corruption. I also had lots of bilateral meetings.

The whole crime issue – fighting corruption – financial crime and other. It’s a global issue and financial crime gets complex.

Everything from cyber attacks on financial institutions, stealing of data, bribery and corruption and tax evasion. It’s a complex web that you’re dealing with. Often when money ends up in some safe haven, it’s to avoid paying tax or it may have been stolen.

How do you keep on top of all of this?

I hear people saying that the amount of illicit money flowing out of this country is “X” and I say how do you know? If it is illicit you wouldn’t be able to track it? Many times you find they are guesstimates. The big thing about dealing with the issue of financial crime and corruption, is we have got to get society to espouse values of integrity and honesty. Society should despise those people who are corrupt and are committing crime. Then you can throw in technology to deal with it. We actually need to be looking at the value system in society and get society to expose the bribery and corruption.

I know that you’ve walked the talk. You haven’t had an easy few years – just as the governor of the Reserve Bank – apart from anything else.

It has not been easy but I wouldn’t give up this job for any other job.

What about the economy at the moment and the interest rate debates? Do you lose sleep over these criticisms?

Criticisms come with the job. The central bank is like a national team, when the team is doing badly, everybody thinks they can tell the team what to do. When the team is doing well, they still want tell them what to do. In any country there’s no shortage of people who think that the central bank should be doing this or that. There are global banks that invest in what is called “central bank watching” – trying to track what the central bank does. “We think they should have done this, we think they shouldn’t have done that”. It’s part of a discourse in society. This discourse elsewhere is rational – based on data and evidence – the problem with the South African discourse is it has been characterised by noise.

When you look at South African, the conversation should be structured and rational, because we entered into a covenant as a society in the Constitution. We tasked the institutions of our democracy to do particular things. We have tasked the judiciary to administer justice, the army to protect our borders. We have tasked to the police to enforce the law and we’ve tasked the South African Reserve Bank to protect the value of the currency. Different institutions have been designed for different things. For a society that has entered into a covenant in the form of the Constitution which says ” The central bank of the Republic of South Africa has the responsibility for price stability and that it must be done independently – without fear or favour”. In the pursuit of the financial stability mandate, we set out a framework. We could have gone for the one that had been done pre democracy where we used money to supply monetary aggregates. We could have gone the route some Asian countries took which was to target the exchange rate and peg it and live with the consequences of that, or we could have done what the majority of central banks have done which is to set a framework with a policy income and to target inflation. saying – “this is the optimal level of inflation” and it is set within a framework that becomes transparent – so everyone knows and there are no deviations from that target – and the Constitution says we must act independently. The flip side of independence is accountability.

Society is correct in asking the central bank to account for how it’s fulfilling that mandate. Whether you are talking to a school kid, or a university student, academics or market players, you are talking to civil society. Having a publicly announced policy income and an inflation target is what gets the conversations going.

You’re here in Cape Town at WEF Africa, we see you all over the world going to various IMF meetings – China, G7 etc… – do you have a brotherhood of central bankers that you bounce ideas off?

Yes we have. There isn’t a big presence of women, but we choose to call it the central banking community not the brotherhood because we would like to see more women in central banking. There is collegiality amongst us and when we meet we discuss the problems we’re facing and how would it be done in another jurisdiction. “This is the experience I have, this is how I have done it, that Governor had dealt with it this way”.

Surely you can also work together against crime?

Yes. We enter into a memorandum of understanding and to exchange information but a lot of the crime is taking place outside of the Central Bank. We have the responsibility of the anti-money laundering compliance and the legislation which is used to regulate it and to enforce those regulations. The kinds of laws that we are talking about tend to take place through financial intelligence centres who co-operate with the prosecuting and law enforcement authorities.

A couple of tough questions to end with. The one starting with Argentina. We’ve seen lots of hope being crashed there and now exchange control being brought back aggressively. We’ve seen a lot of capital flowing out of South Africa through private South Africans. Is this something that might be what keeps you awake at night?

The stated policy of government was that we would liberalise exchange controls to the point where the eventual removal of exchange controls will become a non-event. If you want to attract savings, foreign savings to your country, companies would also invest elsewhere. Lots of South African investment – by South African companies – this has tended to be on the African continent. That is not something that must be discouraged. It’s something we must encourage. But even if South African companies invest elsewhere in the world, South Africans should take pride that South Africa is home to world class companies. There isn’t a shortage of South African companies who have gone out there and succeeded. Some of the companies have burnt their fingers and come home and sometimes it’s important to allow people to do so, so that they can figure it out themselves. They realise that actually growth is here. Many of the South African companies that have succeeded are the ones that decided to use South Africa to drive their growth strategies into the African continent.

The one thing I recommend people should be paying attention to – if they want to understand what’s going on in our country – is the NPC report that you put out every two months. How are you viewing things at the moment? Are you able to end this interview with some hope?

In the previous NPC report we put a growth forecast of 0.6%. People thought we were too optimistic We also spelled out that we do not see pent up demand inflation in the economy. We also said that there are still risks to the inflation outlook and that previously the risks were on electricity, fuel and food prices. Apart from electricity, the other two have got a very strong relationship with currency. The most recent figures of the second quarter made some interesting reading. Our own internal forecasts were for a growth of between 2.7% and 2.9%. Not even the wildest optimist thought that we could have growth of 3.1% in the second quarter. On the production side, that growth was broad based. The only three sectors that were dragging things down were construction, transport and agriculture. Agriculture we think might be because of timing issues – as the winter crops go into the third quarter – but it’s too early to say. The expenditure side made very interesting reading. A strong recovery of household consumption expenditure, strong recovery of investment after five consecutive quarters of contraction. The drag was net exports but the net export picture is not necessarily a bad picture, because we have seen a surge in imports, We need to see whether the momentum is sustained in the third quarter. Growth might not be as strong, because the second quarter was also affected by the fact that the first quarter was so bad. The third quarter might be affected by the fact that the second quarter was so good, which means that you might have growth slowing down but we will know the trend better. September is the month to watch.

I have to put this question to you. We’ve been doing a bit of work with GG Alcock who is very focused on the informal economy and he says there’s a big informal economy that is not being measured. How do you take account of the hundreds of thousands of people who are employed in that sector of society?

Fortunately, there are international norms on how to calculate the size of the informal sector and I would rather leave it with the statistics. We’ve got “Statistics South Africa” that does the actual statistics and when they come, we will analyse and see what they are actually telling us.

But my sense was if it is a big economy, someone should be looking at it?

The statistical agency measures – not just the formal economy – it includes the informal economy.

He was explaining that if we only measured the formal economy in Nigeria you’d have 2 or 3%.

You can say the same in India and in Mexico. All over the world you must still measure that informal economy. You are unlikely to capture the entire informal economy. You make an approximation. There are thousands of informal businesses, some of which could just be in a garage, in the backyard. It is economic activity.