Fighting off pressure to maintain investor confidence
Lesetja Kganyago’s commitment to monetary discipline has played a key role in maintaining investor confidence in South Africa at a time of political and economic uncertainty. Over the past 12 months, the governor of the South African Reserve Bank has managed to strike a delicate balance between the competing demands of rising inflation and the need to encourage GDP growth. This has been achieved by means of an orthodox but proactive approach to monetary policy.
After the South African economy slipped into recession at the start of the year, the Reserve Bank faced intense pressure from local politicians to cut rates to support growth. Echoing calls by president Jacob Zuma and his allies, a June report by the country’s state ombudsman called for changes to the constitution to force the bank to prioritise the socio-economic wellbeing of citizens over inflation-targeting.
Kganyago — who has been in office since November 2014 — led a robust defence of the Reserve Bank’s independence, both publicly and in the courts. In August, in response to a challenge by the bank, South Africa’s High Court ruled that the instruction to change its remit was unconstitutional.
Within the limits of monetary discipline, however, the bank’s governor has proved ready and willing to cut interest rates. After inflation fell to below 6% in April and then again to 5.1% two months later, Kganyago pushed through South Africa’s first rate cut for more than five years in July. The benchmark rate was reduced by 25bp to 6.75%.
His own man
At the same time, Kganyago issued a clear warning to markets that the rate reduction would be reversed in the event of a resumption of inflationary pressures. He also declined to deliver an expected second cut in September, citing the risk to inflation from the weakening of the rand due to investor concerns over economic uncertainty and the potential for further ratings downgrades.
Moody’s reduced its rating on South Africa to Baa3 with a negative outlook in June, putting the sovereign one step away from the loss of investment grade status following a similar cut by Standard & Poor’s in April. Fitch already rates South Africa at BB+.
Despite these headwinds, however, in September the South African Treasury was able to raise $2.5bn from a dual-tranche Eurobond that included a 30 year note. The deal attracted strong support from emerging market investors and was priced at attractive levels.
Much of the credit for this success must go to the Reserve Bank, which under Kganyago has remained a beacon of stability and good governance against South Africa’s increasingly fragile economic and political backdrop.