An address by Lesetja Kganyago,
Governor of the South African Reserve Bank (SARB),
to the Ninety-Seventh Annual Ordinary General Meeting
of the SARB Shareholders
South African Reserve Bank, Pretoria
28 July 2017 at 10:00
This past year has been extremely eventful, from both an economic and a political
perspective. This has been the case both globally and domestically.
A number of themes dominated the global backdrop. First, there were major shifts in
the political settings. Surprise outcomes in the UK1 referendum regarding its continued
membership of the European Union and in the US2 presidential election coincided with
increased concerns about the rise of political populism in a number of regions, a
backlash against rising inequality blamed on globalisation, and a rise in nationalistic
tendencies. The French political landscape changed dramatically, given the
decimation of traditional parties, but a strong move to the extreme right did not
transpire as feared.
Second, these developments threatened the sustainability of the global economic
recovery which had shown signs of resilience after a few years of disappointing
outcomes and false starts. But despite these uncertainties, there appear to be definite
signs that most regions are on a path of sustained recovery from the most recent global
economic crisis. It has taken almost 10 years to reach this point, which is indicative of
how long it takes to recover from economic slowdowns following a financial crisis.
Nevertheless, expectations are for a lower growth trend than in the pre-crisis period.
Third, most of the advanced economies saw a decline in unemployment rates,
although they remain relatively high in the euro area on average. Despite tightening
labour market conditions, wage growth in these economies has remained minimal.
While some ascribe this trend in part to low productivity growth or the impact of
technological change, the full explanation remains a subject of much debate. But this
trend could contribute to the persistence in rising inequality and political instability.
The fourth global theme relates to inflation. Earlier concerns about deflation have
abated. Inflation generally remains benign and below target in most of the advanced
economies despite the improved growth outlook and lower unemployment. The
volatility that was observed was driven primarily by oil price fluctuations. A notable
exception is the UK where the inflation target has been exceeded following the Brexit-
induced depreciation of the sterling. The subdued global inflation environment is
ascribed in part to low wage growth.
Fifth, despite the absence of inflation pressures, monetary policies in the advanced
economies have begun a slow retreat from their highly accommodative stances. The
US Fed3 has led the way with three Fed Funds rate increases of 25 basis points each
in the past year. The Fed has also communicated its intention to begin slowly shrinking
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its balance sheet which was expanded significantly during the global financial crisis
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this year. The ECB4 and the Bank of England have also recently signalled a possible
end to their extremely accommodative monetary policy stances later this year, but
rates are expected to remain low in Japan.
Sixth, capital flows to emerging markets have remained relatively robust but sensitive
to changes in advanced economy policy signals. While changing expectations
regarding ECB and US monetary policy in particular have impacted on a number of
emerging market currencies and bond yields, the reaction has been relatively muted.
Those economies that were most sensitive to the 2013 'taper tantrum' episode have
much-improved macroeconomic balances, and their currencies are less vulnerable to
possible spillover effects from US monetary tightening.
Finally, international oil prices have also been fairly volatile. Attempts by OPEC5 and
other producers to underpin falling prices through output restrictions were effective in
the short run, with oil prices rising to around US$58 per barrel in December 2016 from
earlier levels of around US$45-50, after they had fallen to below US$30 per barrel in
early 2016. Since April we have seen this strategy being undermined by increased
output from shale gas producers in the US in particular, and by non-compliance by
parties to the agreement.
Turning closer to home: while global growth prospects have generally improved, South
Africa is unfortunately an outlier. This past year has seen the worst domestic growth
performance since the recession during the global financial crisis. The economy grew
at a paltry 0.3% in 2016, and recently recorded two consecutive quarters of negative
growth. The SARB6 had expected the fourth quarter of 2016 to be the low point in the
cycle, but growth in the first quarter of this year surprised significantly on the downside
at -0.7%. This contraction was broad-based, with only the primary sector recording
positive growth.
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Despite this, we believe that the worst is behind us and that growth in the second
However, the SARB's growth forecast was revised
quarter of this year will be positive.
down significantly, as communicated at the recent meeting of the MPC7. Growth of
just 0.5% is now forecast for this year, rising to 1.3% and 1.5% respectively in the next
two years. This is clearly too low to make any meaningful inroads on unemployment.
For most of the past year, headline inflation was above the upper end of the target
range of 3-6%, at an average of 6.3% and a peak of 6.8% in December. In the early
months of 2017, inflation moderated considerably and returned to within the inflation
target range in April.
The inflation forecast presented to the MPC at its most recent meeting showed a
marked improvement. While previous forecasts had suggested that the longer-term
inflation trajectory would be uncomfortably close to the upper end of the target range
over the forecast period, the new forecast showed a more benign path. Inflation is now
expected to average 5.3% in 2017 and 4.9% and 5.2% respectively in the coming two
years, with a low point of 4.6% in early 2018. The core inflation forecast is just below
5.0% for all three forecast years.
The drivers of these improved inflation outcomes over the past few months include:

lower food price inflation, as the effects of the drought recede;

lower international oil prices;

lower electricity tariff increases;

a more resilient exchange rate than had previously been expected, coupled
with muted exchange rate pass-through; and

weak domestic demand.
More recently, there have also been indications of some wage moderation.
Despite the improved outlook, the MPC is still concerned that inflation expectations
remain sticky at the upper end of the target range. As indicated in our post-MPC
statement, we would prefer expectations to be anchored closer to the midpoint of the
range. Furthermore, we are aware that the inflation outlook can change quickly in the
event of supply-side shocks. At this point, however, we view the risks to the inflation
outlook to be broadly balanced.
The main risk to the inflation outlook has, for some time, been the exchange rate.
During the past year, while volatile, the rand has been relatively resilient, considering
the adverse shocks it has had to face. At current levels, it is still stronger than it was
at this time last year. The local currency has been supported by the significant
improvement of the current account of the balance of payments, favourable terms of
trade, and the generally positive capital flow environment for emerging markets. The
rand has been adversely affected by low growth, political and policy uncertainty, and
the credit ratings downgrades. These factors, along with the possibility of advanced
economy monetary tightening, continue to weigh on the rand.
For much of the past year, monetary policy has had to deal with the increasingly
difficult scenario of accelerating inflation in the context of slowing domestic economic
growth. With inflation expectations anchored at levels of around 6.0%, the monetary
policy challenges were significant. Furthermore, most of the pressures on inflation
emanated from the supply side, in particular food prices, and were not driven by
excess demand.
Faced with this policy dilemma, the MPC accommodated the temporary breach of the
upper end of the inflation target band and maintained an unchanged monetary policy
stance since the 25 basis point increase of the repo rate8 to 7.0% in March 2016. In
both March and May of this year, as the inflation outlook improved, the MPC indicated
that the tightening cycle was likely to have ended but that a further improvement in the
inflation outlook would be required before the policy rate could be reduced. At its most
recent meeting, following the improved inflation forecast and deteriorating growth
outlook, the MPC reduced the repo rate by 25 basis points, to 6.75% per annum. The
MPC also noted that future policy decisions would be dependent on data outcomes
and the assessment of the balance of risks. The MPC will remain vigilant and will not
hesitate to reverse this decision should the inflation outlook and risks deteriorate.
The most recent global financial crisis saw increased financial stability responsibilities
being given to central banks around the world. Although the SARB has had a role in
ensuring financial stability for some time, our responsibilities in this area have
expanded. The SARB's role in maintaining,
promoting, and enhancing financial
stability is formally mandated in the Financial Sector Regulation Bill (FSR Bill).
Unfortunately, the parliamentary processes to promulgate the FSR Bill took longer
than expected. This has delayed the establishment of the proposed Prudential
which will expand the SARB's regulatory responsibilities in the financial
Authority,
sector. I am, however, pleased to be able to report that the FSR Bill has now been
passed, and is awaiting the signature of the President. Implementation planning is
nonetheless well advanced.
The delay in the promulgation of the FSR Bill has not detracted from our focus on
those areas of responsibility that we currently have, both at macroprudential and at
microprudential levels. As I alluded to earlier, the recovery in the advanced economies
from the global financial crisis has taken 10 years and is still not completely assured.
This underlines the importance of financial crisis prevention. We therefore need to
ensure the stability of the banking sector through appropriate regulation and
supervision, and to monitor the broader economy for excesses that could undermine
financial stability.
As you are all no doubt aware, the SARB has been in the spotlight for the past few
weeks, mainly for the wrong reasons. It is appropriate for me to make a few brief
comments about some of these issues. The first relates to the remedial instruction by
the Public Protector to Parliament to set in motion a process to change the
constitutional mandate of the SARB. We have challenged this remedial action in the
High Court on a number of grounds, and the matter will be heard in court next week,
even though the Public Protector has chosen not to oppose our submissions. Apart
from the issue of whether the Public Protector has overstepped her legal powers in
this regard, or the issue that the remedial actions proposed were unrelated to the
original complaint under investigation, these developments have opened the door to
a debate about the appropriateness of our mandate and of the inflation-targeting
mandate specifically.
Price stability, or the protection of the value of the currency, is a core function of central
banks. I know of no central bank that does not have this mandate. These institutions
are best equipped to carry out this function, and stripping them of this mandate would
raise the question as to where the responsibility for price stability should lie. Our
Constitution is very clear: this is, correctly, a SARB function, and we should protect
the value of the currency in the interest of balanced and sustainable growth in the
South African economy.
There is no virtue to high inflation, which ravages the incomes and savings of the poor
in particular, but which has also wiped out the savings of the middle classes in a
number of countries. We need not look further than our northern border to see the
impact. The wealthy are more able to protect themselves through various hedging
mechanisms, and in this respect inflation has a negative distributive effect. Low
inflation, by contrast, protects the purchasing power of incomes and social pensions
and savings, and provides a more conducive environment for investment and job
creation by reducing uncertainty about future prices.
Any mandate given to a central bank should focus on what it can do and not on what
we would like it to do. A socio-economic objective such as protecting the buying power
of the money in the pockets of South African citizens is an important and attainable
objective, and in the area of our core competency.
Apart from this objective, we also:

ensure the availability of good-quality banknotes and coin;

ensure the effective functioning of the national payment system;

prudently manage the official gold and foreign exchange reserves of the
country;

strive for a stable financial system; and
 regulate and supervise the banking system.
As we have seen from the global financial crisis, such crises have a devastating effect
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on the economy and it takes many years to recover. It would be counterproductive
SARB's
to divert the policies away from these important socio-economic objectives in
order to try and achieve outcomes over which the SARB has little or no influence.
The fact that we do not have an explicit employment or growth mandate does not imply
that we have a narrow focus on inflation to the exclusion of these considerations.
However, we must be clear about what a growth mandate means for central banks.
Monetary policy cannot determine the longer-run growth potential of the economy.
This is the domain of other policies, as potential growth is determined by structural
technology). South Africa's high
policies (e.g. on education, infrastructure, and
unemployment rate is largely structural. The contribution that monetary policy can
make to long-run growth is through ensuring price stability, which is more conducive
to longer-term investment and expenditure decisions. The higher and more volatile
inflation is, the higher the riskiness of investment.
Monetary policy can, however, impact on the real economy over the economic cycle,
i.e. on the extent to which growth fluctuates around potential output. The extremely
moderate nature of the tightening cycle since 2014 is an illustration of our concerns
for cyclical growth. While it is true that excessively tight monetary policy conditions can
undermine growth and employment, the low and at times negative policy rate
prevailing in South Africa in recent years is indicative of an accommodative monetary
policy stance.
The bottom line is this: we cannot solve a structural growth problem with monetary
policy, irrespective of our monetary policy framework. Keeping interest rates artificially
low may have short-term benefits, but it will result in higher inflation in the long run.
We cannot 'buy' higher growth and employment through high inflation. In fact, high
inflation inhibits growth. Low inflation, by contrast, allows for lower interest rates and
higher growth.
Whether we operate in an inflation-targeting framework or not, our objective will still
be the protection of the value of the currency. Inflation targeting is a framework within
which to achieve this target. It makes our objective transparent and helps to anchor
inflation expectations. We would not behave differently in the absence of an explicit
target. Inflation targeting has been successfully adopted by many other emerging
markets as well, and more recently by a number of developing economies, including
Ghana and Uganda.
The issue of private shareholding in the SARB also needs addressing, particularly in
this forum. Private shareholding in central banks is an historical legacy, as originally
central banks were in fact privately owned. This changed over time, particularly since
the 1930s. Apart from the SARB, there are nine other central banks that have some
form of private shareholding. These include the US Federal Reserve System as well
as the central banks of Belgium, Greece, Italy, Japan, and Switzerland.
The critical issue is the role that private shareholders play and the potential for conflicts
of interest. In the SARB, private shareholding does not impart the same rights and
benefits that shareholders in private companies have. The notion of a central bank as
a public policy institution, with the main goal of promoting monetary and financial
stability in the interests of the general public, is remote from the traditional concept of
a commercial company with a profit motive. The SARB is an independent legal person,
a public institution that has no profit motive and is not owned by its shareholders or
anyone else.
Accordingly, shareholders in the SARB:

have very limited rights;

have no role whatsoever in the setting of, or influencing, the key mandates of
the SARB, i.e. monetary policy and financial stability policy;

have no sway over the day-to-day management of the SARB;

are restricted to a maximum of 10 000 shares per shareholder out of 2 million
issued shares (including those of their associates);

receive a fixed return on their shares of 10 cents per share from profits made
(This amounts to an overall divided payment by the SARB of R200 000 per year.
In fact, 90% of the SARB's profits are transferred to
government, and the
remaining 10% are allocated to the SARB's
reserves.);
 do not have any claim on the foreign exchange reserves of the SARB; and

are unable, by means of a resolution or otherwise, to amend or change the
SARB's affairs by deviating from
the prescriptions of the SARB Act9.
In terms of the SARB Act, the most effective powers of the shareholders are:

the approval of the appointment of auditors for the SARB and their
remuneration; and

the election, from a vetted list, of seven non-executive directors to the Board.
(The other eight members are appointed by the President. These include the
Governor and the three Deputy Governors.)
Furthermore, the Board itself is a corporate governance board, and has no input or
say in policies related to the SARB's mandates and primary functions. The Board's
functions are limited to corporate governance issues, internal controls (including
auditing), staff policies, and staff remuneration.
The management of the business of the SARB, including the setting of monetary
policy, vests in the Governor and Deputy Governors, who are appointed by the
President after consultations with the Minister of Finance and the SARB Board. The
Governor and Deputy Governors are clothed with decentralised original powers of
management.
Private shareholding represents an additional layer in the governance framework, to
strengthen accountability and transparency, and complements the mechanism of how
we are accountable to South Africans through their representatives in Parliament.
While international experience does not suggest that the shareholding structure of a
central bank meaningfully affects its performance, there is equally no obvious case for
changing this structure at present. Any move towards 'nationalisation'
would be largely
and would have no impact whatsoever on the SARB's mandate. The view
symbolic
that the SARB is owned and run in the interest of the private sector is incorrect. Our
independence and mandate are enshrined in the Constitution. Whether the SARB has
private shareholders or whether all its shares are owned by government, its primary
mandate remains.
A considerable number of legal considerations would have to be taken into account if
private shareholding were to be removed. The potential purchase of all the SARB
shares by government would require the introduction of suitable legislative measures,
since the SARB Act does not currently provide for this. This legislation would also have
to provide for measures such as the determination of the value of the shares, as
determined by the Legislature.
On private shareholding, it should also be noted that the SARB embarked on a process
of regularising its shareholder structure, which culminated in a judgement obtained
from the Gauteng division of the High Court in November 2016. In terms of said court
order, a total of 149 200 SARB shares held by 15 shareholders were disposed of,
which resulted in 57 new shareholders spread across the general public. The interest
in SARB shares is currently exceptionally high, with standing buy offers from 28 buyers
wishing to purchase 90 109 shares.
Conclusion
The economy has been in recession but is expected to recover in the latter part of this
year. Understandably, in times like these questions arise about the role of central
banks and their contribution to economic growth. Our Constitution is very clear: the
core mandate of the SARB is to protect the value of the currency in the interest of
balanced and sustainable growth in the South African economy. However, monetary
policy cannot determine the longer-run growth potential of the economy. Our
Constitution is clear on this, too: in carrying out its mandate, the SARB must not bow
to any pressure, be it political or from the private sector.
Despite the challenging environment in which we operate, the SARB as an institution
remains strong; it is staffed by people who are committed to the promotion of the
economic well-being of all South Africans.
Thank you.