An address by Fundi Tshazibana,
Deputy governor of the South African Reserve Bank,
at the Central Bank of Eswatini,
Mbabane, 17 November 2023
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Global shifts and regional spillovers how are we performing?
Introduction
Ladies and gentlemen, thank you for the opportunity to address you today at this event
hosted by our colleagues at the Central Bank of Eswatini. The relationships between
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our respective central banks go back a long way after all, the Common Monetary
Area (CMA) of Southern Africa is the oldest existing currency union in the world, dating
back to the beginning of the 20th century. The deep economic ties between the
economies in the CMA, and our pegged exchange rates, underscore a high
synchronisation in our economic cycles, especially in responding to the impact from
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global shocks, trends and spillovers to the African region a central theme of my talk
today.
The past three to four years have seen many global shocks, and their ramifications
continue to reverberate. In fact, we are still uncertain about the long-term effects these
shocks will have on the world economy, trade and capital flows. While the COVID-19
pandemic may no longer be a major health concern, we still face a world of relative
price shifts, high inflation, re-organisation of supply chains and increasing geopolitical
risks. Encouragingly, both the global economy and our regional context have shown
some resilience to these shocks. But some effects might come with a lag and
complicate the task we, as central banks, face in maintaining price stability and
financial stability. These are some of the issues I will try to address today.
Some encouraging global developments
We are all well aware of the inflation surge experienced globally in 2021 and 2022,
driven by supply and demand mismatches that emerged as economies reopened in a
staggered manner after the COVID-19-related lockdowns. During this period,
advanced economies experienced inflation levels not seen since the early 1980s. To
limit the permanent release of the inflation genie out of the bottle, advanced economy
central banks had to act decisively by raising rates to levels last seen before the 2008
Global Financial Crisis.1 In emerging market and developing countries, most central
banks had to tighten too, though the degree of the policy response varied considerably
based on idiosyncratic factors.
The good news is that in the past year or so, inflation rates have declined around the
world. However, core inflation has remained rather sticky. This is the case with labour-
intensive services in advanced economies, against a background of still-tight labour
markets. Nonetheless, services inflation is now falling in most countries. Favourable
base effects in energy, food and the unwinding of supply chain bottlenecks have also
tempered price increases in other consumer price index (CPI) components.
Furthermore, longer-term inflation expectations, at least in major advanced
economies, have remained reasonably well anchored, a testimony to central banks
retaining their credibility.
As a result, the monetary policy tightening episode appears largely complete. While
central banks maintain vigilance against persistently high inflation, they demonstrate
rising evidence of the transmission of earlier rate hikes to financial conditions and
credit demand. Consequently, financial markets now see no probability of an additional
hike in the United States (US) or eurozone. In the emerging economies, some of those
central banks which had acted early and proactively to deal with inflation now have the
flexibility to consider rate cuts.
Another encouraging development is that disinflation is occurring alongside the
IMF's October World Economic
surprising resilience of the global economy. The
Outlook estimates that global growth will only slow to 3.0% this year, from 3.5% in
2022. In addition, Bloomberg consensus of economists now also expects world growth
of 2.8% in 2023, up from only 2.1% projected at the beginning of the year. In advanced
economies, most private sector balance sheets were solid at the time when monetary
policy was tightened. Cash buffers supported private spending, while in the US,
corporate borrowers had 'locked in' low-cost medium-term financing when interest
rates were at historic lows. This delayed the impact of higher rates on demand.
Cross-border capital flows, while weak by historical standards over the past few
quarters, have nonetheless displayed equal resilience in 2022-23, considering the
size of the repricing in advanced economies' bond markets, usually a "bellwether" for
global investor risk appetite. Over the past 12 months, portfolio flows to emerging
markets over the past 12 months are only a 0.3 standard deviation below their average
of the past 10 years.2 This is good news, considering that the 10-year US Treasury
yields have risen by about 300 basis points since the beginning of 2022.
Some of this better-than-expected news appears to have spilled over to the sub-
Saharan Africa (SSA) region. In its October 2023 Regional Economic Outlook, the
International Monetary Fund (IMF) projected a rebound in regional growth from 3.3%
this year to 4.0% next year. Similarly, the IMF noted that median inflation for the region
fell by 3 percentage points between March and July, and that most governments have
started to consolidate fiscal policies, thus helping to stabilise debt-to-GDP ratios. In
response to this improved environment, most SSA central banks have also paused
their tightening cycles.
We have also observed moderating inflation rates, as well as some resilience in
economic activity, in CMA counties. In South Africa, inflation stood at 5.4% year on
year in September, down from a peak of 7.9% in July last year. A similar pattern has
been observed in other CMA countries, and indeed, my colleagues at the Central Bank
of Eswatini recently revised down their 2023 inflation forecast from 5.55% to 4.93%.3
Inflation also fell faster than expected in Lesotho, and in Namibia, with expectations of
a further decline in 2024.
At the same time, the South African economy performed better than expected in the
first half of the year, leading the South African Reserve Bank (SARB) to revise its 2023
growth forecast upwards to 0.7%, from a low of 0.2% in March.
Risks of negative spillovers remain elevated
Despite these recent improvements, the global environment remains challenging. In
the shorter term, higher advanced economy bond yields can still undermine, with a
lag, cross-border capital flows. These are key to the funding of countries with external
and public deficits, like most of us in the SSA region. History suggests that capital
flows are more vulnerable, not only when nominal yields but also real yields are rising
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as the latter typically reflect a re-pricing of the future path for policy rates, or higher
term premiums for longer-dated maturities.4 This has been the case in the US these
past two years, where the real 10-year yield rose from -1.0% at the beginning of 2022
to a peak of 2.5% by the end of October.
Bloomberg columnist John Authers recently drew a parallel between 2023 and 1987,
a year when rising real yields in the US co-existed with resilience in 'riskier' assets,
especially equities, until the stock market crashed in October of that year.5 We do not
want to be 'prophets of doom' and predict market corrections that may or may not
happen, but in recent months, we have already seen declines in equity prices, as well
as emerging market currencies and bond markets. Higher yields may still translate,
with a lag, into a further correction in riskier assets, especially if economic activity in
the US eventually slows, as most economists expect.
The tragic events unfolding at present in the Middle East, less than two years after the
start of the conflict in Ukraine which shows no sign of an immediate resolution,
highlight the importance of geo-political risks. These can negatively affect the global
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economy via trade, commodity prices especially oil and higher asset price volatility.
Beyond geo-political issues, climate change, and the potential it has to generate
greater volatility in agricultural commodities and changes in resource allocation,
presents another risk to global inflation. In fact, as Christine Lagarde recently
remarked, the world may have entered a period where supply shocks will become
durably larger, and more frequent than in the past.6
These non-financial factors can have a direct impact on financial markets and capital
flows, as investors may require a higher risk premium for holding riskier assets. They
can also have an indirect impact, as more frequent and larger supply shocks have a
larger probability of de-anchoring inflation expectations, forcing central banks to be
more cautious and resulting in tighter policy over the economic cycle.
This can enhance financial stability risk. Expectations that the era of low and stable
interest rates would last influenced both the funding and investment models of many
financial institutions, leading them to increase their exposure to interest risk. If higher
yields for longer become the norm, many investment positions may be liquidated
simultaneously, adding to asset price volatility.7
Negative spillovers from the global environment to our regional economies are not
limited to financial flows. Merchandise trade flows also pose a risk to emerging market
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and developing country growth. Global trade in merchandise goods after the post-
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COVID-19 rebound appears to be in a recession phase.8 China's shift away from
infrastructure and property investment, towards more household consumption and
away from infrastructure and property investment poses a challenge for commodity
exporters. As a result, African exports have been contracting since the second quarter
of 2023.
Beyond the current weakness in global export and import flows, the international trade
system could suffer from geo-economic fragmentation in the medium term if geo-
political rivalries unravel the multilateral, rules-based system. Rival trade blocs that
engage less which each other, be it with respect to trade, foreign direct investment or
technology transfers. Recent research from the IMF suggests that the SSA region,
with its broad spectrum of export destimations, could experience the most significant
output losses from such fragmentation.9
Regional vulnerabilities to global challenges
Although the SSA region has displayed resilience to global shocks, these
improvements are still fragile and insufficient to bolster the region's attractiveness for
external investment. First of all, inflation remains too high in many SSA economies.
Among the 10 largest economies in the region, six still had double-digit year-on-year
inflation rates as of September. Recent currency depreciation in many SSA countries
(where a large part of the consumer goods basket is imported, and where inflation
expectations are often poorly anchored) risks perpetuating high inflation, in terms
triggering addition foreign exchange losses.
Many countries in the SSA region tend to suffer from 'twin deficits' (fiscal and external)
which raise the cost of debt servicing and refinancing at a time when global investors
are more risk-averse, and more sensitive to deteriorating fiscal dynamics. According
to the IMF, over half of the SSA countries are either at a high risk of debt distress or
already in debt distress.10 No country in the region has been issuing Eurobonds since
April 2022, suggesting that the refinancing of external debt could be particularly
challenging in the next few years.
Finally, economic performance in the SSA region remains uneven, and generally falls
short of the performance seen two decades ago- a period when investment in the
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region increased steadily. South Africa is one of the laggards in the region the SARB
only expects growth to accelerate to 1.0% in 2024 amid continued constraints from
insufficient electricity production and inefficient transport networks. Other CMA
countries also look set to fall short of the regional average. More generally, the IMF
notes a tendency for resource-intensive economies to underperform, highlighting the
lingering problem of the SSA's insufficient downstream integration into value chains.
How policy can best respond
In response to these global challenges and regional vulnerabilities I have described,
policymakers in our region, including us central bankers, still have work to do.
Here is a list of the issues we should consider:
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Policy response is not for central banks alone
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Structural reforms are unavoidable
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Controlling inflation is not negotiable
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Close supervision of banks and non-banks is a must
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And a credibility fiscal path is not only a necessary for fiscal sustainability but
to bolster confidence, ensure financial stability to give some breathing room to
monetary authorities
High and volatile inflation discourages external capital inflows. It also discourages
domestic fixed investment, erodes the purchasing power of the more vulnerable in
society, and generally leads to a sup-optimal allocation of resources. This makes it
essential for central banks to ensure that inflation returns swiftly to target, even when
the causes of deviation are due to external factors, domestic supply shocks or
necessary exchange rate adjustments.
Market-determined exchange rates support foreign investment and enhance the
allocation of resources in the longer run. Within the CMA, the rand is able to play its
role of 'shock absorber' in episodes of capital outflows, and this helps reduce the
length and size of such episodes. In the near term though, currency realignment is
typically associated with an inflationary shock, and it is a central bank's task
to ensure
that the shock does not become permanent. Credible monetary policy frameworks are
required to help facilitate the eventual return to lower inflation rates.
Arguably, both the spillovers from global shocks and the policy response required to
deal with the inflationary consequences can increase the vulnerability of a country's
financial institutions. To avoid conflict between price and financial stability goals,
central banks should act pre-emptively by monitoring the evolution of financial
institutions' balance
sheets and take appropriate action in the case of excess risk
concentration or growing forex or duration mismatches. In the context of escalating
public debt levels, heightened exposures of both banks and non-bank financial
intermediaries to the sovereign require close supervision.
Fiscal policy can play a crucial role in limiting both price and financial stability risks,
especially in those SSA countries which, like South Africa, have seen elevated deficits
and rising debt ratios in recent years. A credible fiscal consolidation path can boost
investor confidence, stabilise the currency and reduce the risk premia on government
debt. Reforms that help in broadening the tax base, prioritising productive public
investment and reducing wasteful expenditure, can all assist in fiscal consolidation,
without causing significant real income losses.
More generally, structural reforms that help foster stronger and more inclusive growth
would facilitate the task of both monetary and fiscal policymakers. These can include
the deepening of domestic capital markets to reduce reliance on external funding at a
time when the cost and availability thereof have become more challenging. They can
also entail steps that facilitate the diversification of African economies, the broadening
of their export base, and their stronger integration into global supply chains. Reforming
network industries, fostering skills development and training, and reducing barriers to
entrepreneurships would all assist in that diversification.
Concluding remarks
As the year draws to a close, we can take comfort in the relative resilience of the global
economy and financial systems. The global economy continued to expand in 2023,
despite being buffeted by high inflation, rising interest rates and heightened geo-
political tensions. Credit continued to flow, albeit at a more moderate pace, and any
corrections in asset prices occurred in an orderly fashion. Closer to home, we are
encouraged by signs of declining inflation and improving growth prospects.
Nevertheless, the road back to price stability remains lengthy and one that is likely to
be fraught with more uncertainties than we were accustomed to before the pandemic.
Consequently, global interest rates may become structurally more volatile, at a time
when cross-border trade and financial linkages potentially realign alongside
geostrategic considerations. It is our task as central bankers to be ready to respond to
how these patterns affect price formation. We remain committed to fulfilling our
mandate of price stability.
Thank you.