Remarks by Lesetja Kganyago,
Governor of the South African Reserve Bank,
at the annual dinner in honour of
the Ambassadors and High Commissioners
to the Republic of South Africa
South African Reserve Bank, Pretoria
31 July 2018
Introduction
Dean of the Diplomatic Corps, Ambassadors, High Commissioners, Counsellors and
-
Diplomats, ladies and gentlemen a very good evening and a warm welcome to the
South African Reserve Bank (SARB). I would like to extend my heartfelt gratitude to
you for accepting our invitation to this annual event.
This year, we celebrate the 100th anniversary of the birth of Nelson Mandela. Earlier
this month, for the first time in the nearly 100-year history of the SARB, we issued a
commemorative banknote series as well as a third commemorative R5 circulation coin
in honour of the life of former President Mandela. Tonight, I would like to briefly reflect
Tata Madiba's
on what we can learn from legacy, both as a statesman and as a
champion of institutions.
under Nelson Mandela's
After all, it was presidency that the defining characteristics of
South Africa's foreign
policy and trade policy, as well as our interaction with foreign
investors, were established.
Madiba had a vision that South Africa should be 'ready to play a role in fostering peace
and prosperity in the world that we share with the community of nations'.
In 1993, a year before he became president, Nelson Mandela highlighted that 'our
foreign policy will rest on the belief that economic development depends on growing
regional and international economic cooperation in an interdependent world'.1 Since
Madiba's presidency, South Africa's
the foundation of all of interactions with the rest
of the world has always been strong domestic institutions and a robust macroeconomic
framework that provides policy certainty, supported by our participation in multilateral
institutions and forums that are transparent and fair.
Looking at the state of the global and domestic economies today, it is worth reflecting
on the importance of institutions in managing risks and dealing with crises.
Reflecting on the global economy
The global economy today looks very different from a year ago. Last year, the
backdrop for South Africa and other emerging markets was generally constructive, as
the recovery of the advanced economies continued on a steady path. The stronger
demand supported higher commodity prices, while expectations of a moderate
withdrawal of monetary stimulus in the advanced economies were supportive of strong
capital flows to the emerging markets.
However, this favourable setting did not last long. A number of key risks have since
emerged that threaten to unsettle the global economy. During the early part of 2018,
growing expectations of a faster pace of monetary tightening began to emerge, as the
stronger pace of United States (US) growth was sustained and fiscal policy became
more expansionary. Growth in Europe and Japan has slowed, while the strengthening
of the dollar has resulted in a reversal of capital flows from the emerging markets.
In addition, concerns about the rise in protectionism have materialised, thus
contributing to an escalation in trade tensions. Concerns about a possible trade war
have contributed to uncertainty about world trade, which could derail the global
economic recovery that policymakers have been working hard at since the global
financial crisis. We are already witnessing the adverse effects. In April, for example,
we saw the largest decline in world trade since May 2015.
Trade wars are, in effect, a 'zero sum' game. Small open economies suffer the most,
as they rely on trade with the advanced economies and large economies - who are the
price setters. Addressing these risks at both country and global level requires strong
institutional frameworks and a commitment to cooperation and coordination.
The rising interconnectedness has widened the set of shared problems that are more
effectively addressed through a global agenda. In this respect, collaboration is
essential. This includes, among other things:

reaffirming the open and rules-based multilateral trade system;
 strengthening the global financial safety net;

addressing the excess external imbalances;

completing the financial regulatory reform agenda; and

reaching the 2030 Sustainable Development Goals.
These issues are central to the agendas of the Group of Twenty (G20), the Financial
Stability Board, the Bank for International Settlements, the International Monetary
Fund, and the World Bank. South Africa is an active participant in all these institutions.
South Africa's
As you may be aware, the 10th BRICS2 Summit, this time under
was
presidency, concluded a few days ago. Its theme 'BRICS in Africa: collaboration
for inclusive growth and shared prosperity in the Fourth Industrial Revolution'. Since
the beginning of 2018, the SARB has actively driven a number of initiatives among the
BRICS central banks. This has included initiatives directed at enhancing the research
capacity of the Contingency Reserve Arrangement (CRA), further work on the
establishment of the BRICS Bond Fund to support the development of local-currency
bond markets in the other BRICS countries, and a stocktake exercise on financial
technology as it relates to crypto-assets and the regulation thereof. Finally, and very
significantly, the BRICS central banks have, for the first time, conducted a test run of
the CRA with an actual transfer of funds. This exercise commenced on 3 July and was
completed successfully today.
Building strong institutions on the African continent is also very important to support
development and improve the continent's resilience to -
shocks. The SARB through
its chairing of the Association of African Central Banks and as the Chair of the
Committee of Central Bank Governors in the Southern African Development
-
Community has been involved in a number of activities in support of economic and
financial integration on the continent. These initiatives have spanned, among other
things, the areas of banking supervision, strengthening central-bank independence,
regional payment systems, financial-market deepening, financial stability, and
financial inclusion. Other issues that require urgent attention include the negative
impact of the withdrawal of correspondent banking relationships on trade flows and
remittances, as well as the limits to domestic revenue mobilisation due to illicit flows.
The South African economy
South Africa's growth outlook remains challenging. At
the most recent meeting of the
SARB's
Monetary Policy Committee earlier this month, the growth forecast for 2018
was revised downwards to 1.2% from 1.7% in May. The growth forecast for 2019 is
1.9% and 2.0% for 2020, both of which are significantly lower than the levels required
to generate employment and to reduce inequality and poverty rates. While we consider
the current monetary policy stance to be broadly supportive of the economy, inflation
risks are to the upside, and our fiscal framework is vulnerable.
in 1996 under Nelson Mandela's leadership, the
Faced with similar conditions back
South African government had to make some really difficult decisions. It was resolved
to make the required policy choices and strengthen macroeconomic institutions. This
garnered investor confidence and placed South Africa on a strong economic footing in
the early 2000s.
Recent research conducted by the SARB3 suggests that the collapse in the levels of
confidence over the past few years had shaved off around 1 percentage point from
growth in both 2015 and 2016. In the months since December 2017, we have seen a
rebound in business and consumer confidence. However, a cyclical recovery based
on a rebound in confidence will not be enough to grow the economy lower levels of
poverty, reduce inequality, generate much-needed employment, and boost
government revenues. Given the weak medium-term growth prospects, structural
reforms and appropriate fiscal policies are critical to boosting potential growth and
sustaining confidence levels, by raising productivity and promoting human and
physical capital, and enhancing inclusiveness.
Underlying the subdued growth performance of the South African economy has been
the weak trend in gross fixed capital formation, particularly by the private sector. We
need to reverse the downward trend in the ratio of gross fixed capital formation to
gross domestic product, which had declined to 18.7% in 2017, down from a peak of
23.5% in 2008. This is some way off the 25% target set in the National Development
Plan.
The role of the South African Reserve Bank
Achieving higher potential output growth is not within the power of the central bank.
The SARB can, however, contribute to an improved environment in a number of ways.
identified South Africa's
For some time, ratings agencies and investors had
institutional strength as one of the stand-out features of its economy. Unfortunately,
the past few years have seen a steady erosion of some of our key institutions.
Fortunately, there is now a renewed focus on reversing this negative trend. In fact, this
renewed focus is part of the reason forwarded by Moody's for retaining the country's
investment grade rating.
The SARB, specifically its independence coupled with its mandate on price stability
and financial stability, is seen as an important part of the institutional strength of the
country. We have vigorously and successfully defended attempts to undermine our
independence and integrity, and we will continue to do so.
Conclusion
from Madiba's
To sum up, here is what I have learnt legacy:

To occupy its rightful place in the global economy, South Africa must first get
its own house in order.

We must start by implementing those policies that we have identified for growth
and the development of our people.

To protect ourselves from external shocks, we must build buffers by allowing
our institutions to work as they were intended to work.

As a small open economy, securing future growth requires us to work with our
neighbours and trading partners, directly and through multilateral institutions.
Let me conclude by quoting from a speech that Nelson Mandela delivered to the
diplomatic corps in 1999:
"I do need to say to each and every diplomatic representative this evening that
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whilst our achievements like our hope for the future would not be possible
without the patience, sacrifice, commitment and determination of all our people.
Our task has been made easier because we have been blessed and sustained
by the goodwill and support of our subregion, our continent and the global
community. For this we are very grateful to you all.4
Thank you, and enjoy the evening.