Remarks by Lesetja Kganyago,
Governor of the South African Reserve Bank,
at the JSE/NYSE Market Close Event,
New York,
10 October 2022
Good afternoon distinguished guests, investors, members of the media, South African
delegates, and New York Stock Exchange representatives.
It is a privilege to address you here today, following the signing of a new memorandum
of understanding (MoU) between the Johannesburg Stock Exchange (JSE) and the
New York Stock Exchange (NYSE).
This new MoU will foster closer ties between the two markets, and is aimed at
increasing economic partnerships and trade opportunities. It is encouraging that the
JSE and NYSE will continue to explore new areas of cooperation and collaboration in
strengthening their value propositions for their respective markets.
South Africa shares significant economic interests with the United States (US). South
Africa is the US's largest African
trading partner and has the most diversified and
industrialised economy on the continent. Despite the rapid growth in Asian economies,
remains one of South Africa's top five main trading
the US partners.1 In 2021, US
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exports to South Africa totalled US$5.5 billion a 25.8% increase from 2020, while
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US imports from South Africa totalled US$15.7 billion a 38.5% increase. There are
approximately 600 US businesses operating in South Africa and many use South
Africa as their regional headquarters,2 and a springboard for greater opportunity on
the African continent.
These structural features of our economic relationship are stable and will certainly
grow in the coming years. Nevertheless, the global economic environment is
challenging and is likely to remain as such for the next year or so, as we all find our
way out of the economic repercussions of the COVID-19 pandemic. Critical to shaping
our path will be considered policies that seek to reduce volatility and uncertainty, and
which aid the long-term investment that underpins sustainable economic growth. Let
me focus briefly on the global economy and South Africa's response.
This is an unusually challenging time for the global macroeconomy. High inflation has
now taken centre stage in the global debate on monetary policy, as prices continue to
climb at rates last seen decades ago.3 We have seen major central banks raising
interest rates at the fastest pace in a generation.
The current inflation surge has its roots in the highly expansionary policy actions taken
to minimise the adverse effects of the lockdowns. With the benefit of hindsight, these
were too expansive and extended for too long. Coupled with supply chain disruptions
due to COVID-19, and mobility restrictions, this caused a sharp increase in the
demand for goods early in the recovery. Labour markets tightened as a result, while
Price pressures have been worsened by Russia's
food and oil prices rose sharply.
invasion of Ukraine, with the effects going beyond the direct impacts of the war on the
prices of oil, food and industrial commodities. We are now looking at increased
pressures for deglobalisation, at least some form of it, particularly supply chain
realignments.
Although there has been some cooling in energy and food prices over the past couple
of weeks, and slower economic growth which could potentially further temper price
pressures, the trajectory for inflation and its outlook remains highly uncertain. The
broadening of inflationary pressures means that swift and decisive policy action has
become imperative.4 Globally, central banks have responded.5
Like the global economy, the domestic economy has been hit by multiple and often
overlapping shocks, some positive and some negative. For instance, the strong global
terms of trade, and thus growth. Russia's
growth in 2021 supported South Africa's its
commodity export prices, lifting
invasion of Ukraine provided impetus to South Africa's
growth in the first quarter of 2022.
However, these positive global shocks are fading, shifting us back into more usual
conditions. Our macroeconomic adjustment to the pandemic was greatly aided by low
inflation and a strong terms of trade, which helped create the policy space to cut rates
and provide fiscal support. Now, as the domestic recovery continues and global
conditions suggest further easing of commodity prices, our external balances have
begun to adjust back to deficits. This will bring into sharper focus the financing needs
of the economy and the currency, both as a facilitator of economic adjustment and as
a source of inflation risk.6
These changing global conditions impact on how we conduct monetary policy. From
being in a position to cut rates deeply to support recovery, we are now in a very
different environment. While it is the case that our inflation rate was fairly modest for
a long time, it clearly has moved higher quickly, necessitating larger rate hikes to move
out of an overly accommodative stance.
The tightening of monetary conditions, from exceptionally easy to neutral, is matched
by fiscal actions to achieve a primary surplus and reduce the rate of growth in the
public debt. These consistent policy actions are critical to further de-risk the economy
in these more challenging global conditions. Alongside a robust macroprudential
regulatory environment, moving to a more neutral macroeconomic policy stance
improves the risk-reward ratio for private sector investors, both foreign and domestic,
and will lead to stronger investment rates over time. Foreign and domestic capital have
always played key roles in providing the financing of South Africa's needs. In the years
of the global financial crisis and in the early weeks of the pandemic, risk aversion
resulted in the sale of rand assets by foreign investors. This was complemented by
resident savers shifting out of their foreign asset holdings and back into rand assets.
As the global and domestic economy become less risky in the coming months and
years, the build-up of these financial positions will occur again. Foreign investors will
re-enter South African markets (and other emerging markets) due to better real growth
differentials and higher yields, while residents will rebuild diversified portfolios that
foreign assets. It is useful to remind ourselves that South Africa's financial
include
markets are deep and robust, and well integrated with world markets. Financial system
assets are nearly 300% of GDP, roughly three times the emerging market average.
We were reminded during the early days of the pandemic of the need for central banks
to provide appropriate backstops to financial markets. We do not want to create a
moral hazard, either in the public or private sectors, but we do want to step in where
liquidity evaporates.
As the Bank of England recently demonstrated, in a crisis a central bank has
extraordinary abilities to stabilise conditions, buying time for markets to better read
current conditions and to adjust. Strong countries have good emergency response
systems, and in a real crisis the South African Reserve Bank was there to backstop
the system and return it to normal functioning.
Such extraordinary policy actions work best when the underlying financial structure is
sound, in particular where the debt structure has a long maturity. This is an important
reason why our yield curve is steep: long-term debt is genuinely being held, in
volumes, by private investors, and it is priced accordingly. The point is: the news is in
the price, and it is an attractive price. It is not an artificially low price, held down by
policies that we cannot sustain or that are inconsistent with our economic conditions.
There is another reason the prices of South African assets are attractive, and that is
the exchange rate. As you know, in South Africa we have a free-floating exchange
rate, and we are very tolerant of exchange rate fluctuations. This is because we have
low levels of foreign exchange debt, and we have inflation expectations that do not
react strongly to exchange rate movements. This means the currency is free to adjust
to global conditions, and when it depreciates, as it has done recently, it makes South
African assets very attractive in foreign currency terms. You could say this is a strategy
of attracting the smart money: when the currency moves a lot the smartest people buy,
and this helps reverse the outflows.
Let me conclude with a reminder that appropriate policy targets, as well as policy
consistency and complementarity are important characteristics of successful
economies. Increasing debt levels and high inflation are features of bad policy,
imbalance and instability, not of sustainable economic growth. We have moved firmly
back into a trajectory focused on sustainable fiscal policy, and with monetary policy
capable and willing to reduce inflation, the investment environment in the country will
continue to improve.
I have spoken recently about adjustments to our inflation target itself, which I believe
would be in line with the original planning for our inflation-targeting framework and
deliver better economic results. I hold firmly that a better inflation target is like the
example of a US$100 bill lying on the sidewalk, waiting for us to believe our eyes and
pick it up. These steps are not enough to achieve the stronger economic growth rates
the country needs, but they are critical steps in moving forward. We can square the
circle of policy complementarity by moving faster on the reform of the energy sector
and other structural reforms that would make South Africa's investment environment
more attractive to domestic and foreign capital.
Thank you.