Remarks by Lesetja Kganyago,
Governor of the South African Reserve Bank,
at the annual dinner for the Heads of Foreign Missions
accredited in South Africa
South African Reserve Bank, Pretoria
12 June 2019
Introduction
Dean of the Diplomatic Corps, Ambassadors, High Commissioners, Counsellors and
Diplomats, ladies and gentlemen - good evening.
Thank you for accepting our invitation to this annual dinner hosted in honour of the
Ambassadors and High Commissioners appointed to the Republic of South Africa.
We use this dinner to share our thoughts on the developments in the South African
economy, and to highlight issues of importance in the area of global and bilateral
cooperation.
Tonight, I would like to focus my remarks on two important issues that are
increasingly coming under threat globally, namely multilateralism and central bank
independence.
The impact of technological advances on global value chains, rising inequality,
extreme weather conditions related to climate change, increased cross-country
migrations and escalating trade tensions have all brought multilateralism under
closer scrutiny, as nationalistic tendencies and inward-looking policies gain traction.
On the other hand, the difficulties related to sustaining the global growth recovery
have resulted in a discourse that many believe requires broader mandates and
increased action from central banks.
As with other calls for change in recent economic history, all this was spurred by a
crisis.
Key global developments and international cooperation
During the most recent global financial crisis, efforts to avert a second Great
Depression saw international cooperation reach a new high. Central banks acted
decisively and in a coordinated manner to shore up liquidity in financial markets. In
the face of continued and significant volatility and vulnerabilities in sovereign debt
markets, the financial resources of the International Monetary Fund (IMF) were
significantly increased and the IMF revisited its lending toolkit, making it more
relevant and more effective. However, while the global financial crisis brought forth
new and stronger cooperation, the post-crisis recovery has not been as strong as
was hoped.
Globalisation is therefore increasingly being blamed for the lacklustre recovery in
some countries and for the significant negative spillovers of the crisis across borders.
Many are blaming globalisation for the lack of inclusive growth, both within and
across countries.
In some countries, significant numbers of people have been lifted out of poverty and
new industries have been created. In others, there have been increased job losses,
especially among the middle class. Some countries have also experienced elements
of deindustrialisation. Consequently, there has been a move towards populism and
elected politicians are increasingly turning to protectionist policies as a solution.
Unfortunately, trade wars and protectionism are not the panacea some believe them
to be. The IMF has estimated that the current and threatened United States (US)-
China tariffs could cut the global gross domestic product (GDP) in 2020 by 0.5% -
or about US$455 billion. To put this into perspective, the estimated loss is larger
than South Africa's annual economic output.1
We are already seeing the impact of trade tensions reflected in weaker trade
volumes, declining investment levels, and worsening investor sentiment. The
manufacturing sectors in the Organisation for Economic Co-operation and
Development (OECD) countries, which have strong links to the global value chain,
have been significantly influenced by the recent tariff measures.
In addition, uncertainty around future trade developments is expected to reduce
OECD's business investment growth from 3.5% in 2017/18 to around 1.7% in
2019/20. As long as these trade tensions persist, the downside risks to global growth
will increase.
Before more damage is done, a more integrated, cooperative and coordinated
approach is required, incorporating the principles of multilateralism. Protectionist
and isolationist approaches to dealing with global challenges will simply not take us
very far.
In October last year, IMF Managing Director Christine Lagarde called for a 'new
multilateralism' - one that is dedicated to improving the lives of all citizens, one that
ensures that the economic benefits of globalisation are shared much more broadly,
and one that focuses on accountable governments and institutions that work
together for the common good. This 'new multilateralism' is key to providing the
foundation for global cooperation to tackle the many transnational challenges,
including managing the risks related to, among other things, climate change,
cybercrime, increasing conflict and refugee flows, failures of governance, and illicit
finance flows.
An essential component of global cooperation relates to the global financial safety
net (GFSN). Today, the GFSN includes international reserves, bilateral swap lines,
regional financing arrangements, IMF resources and market-based instruments.
While the size of the GFSN is larger than it was before the global financial crisis, the
adequacy and coverage of the GFSN as well as its capacity to handle future
economic and financial crises continues to be debated.
South Africa and the South African Reserve Bank (SARB) have continued to be active
participants in international efforts to promote constructive dialogue as we seek global
solutions to global challenges. As part of this work, we interact with many of the
countries that you represent, be it as a member of the IMF, the G202, BRICS3, the
Southern African Development Community (SADC), the Association of African Central
Banks, and various standard-setting bodies and regulatory forums.
The initiatives that the SARB has been involved in since we last met include the
following:
•
There have been ongoing discussions about providing adequate resources to
ensure that the IMF can fulfil its role at the centre of the GFSN.
•
Enhancing the effectiveness of the BRICS Contingency Reserve Arrangement
(CRA) has also remained top of the agenda. The CRA is a self-managed
contingent reserves arrangement instituted to forestall short-term balance of
payments pressures, provide mutual support, and further strengthen financial
stability.
•
Another priority has been strengthening the macroeconomic research capability
to support the CRA.
•
In the region, the SADC Real Time Gross Settlement System4 has continued
to gain momentum. Between July 2013 and February 2019, more than 1 million
transactions were settled on the platform, representing a value of R5.5 trillion.
•
In addition, we have successfully collaborated with the European Central Bank,
the Bank of England and the Bundesbank to develop certain skills of SARB staff
members and to share and transfer knowledge in areas related to the SARB's
domestic and regional work.
The independence of central banks and the South African Reserve Bank's role
in the South African economy
Another topic that has been prominent over the past two years or so, and which
seems to be gaining momentum, relates to central bank independence. In the words
of Kenneth Rogoff, 'with the global rise of populism and autocracy, central bank
independence is under threat'.5 This applies to many countries, developing and
advanced, including South Africa.
South Africa's disappointing economic performance over the past 10 years has
contributed to growing calls for the expansion of the mandate of the SARB to directly
stimulate growth and address unemployment.
The SARB's mandate, which is to achieve and maintain price stability in the interest
of balanced and sustainable growth, is enshrined in the Constitution. In this regard, by
keeping prices stable, the SARB creates the necessary economic environment for
sustainable growth and development. An economy with stable inflation provides
certainty, improves planning, and therefore supports consumer, business and investor
confidence, which are essential in driving economic activity that facilitates growth and
employment creation. Lower prices also support South Africa's competitiveness in
global trade.
The inflation-targeting framework has served South Africa well. It has helped us
achieve lower inflation and therefore lower interest rates. It has also increased the
transparency of monetary policy, and made the SARB more accountable for its
actions. We have come a long way from the days when the Governor could decide on
interest rates in his office on a Friday afternoon, and not even publicise his decision,
let alone his goals or reasons.
In terms of inflation, South Africa has joined many other emerging markets in getting
inflation down to fairly low single-digits. In the 1980s our average inflation rate was
15%. It was nearly 10% through the 1990s. Since the introduction of inflation targeting,
in 2000, inflation has averaged just over 6%, at the top of our target range but still
substantially lower than in the preceding decades. It has also fallen further in recent
years, to about the middle of our target range - the average last year was 4.6%, and
we expect 4.5% this year.
Lower inflation means we can have lower interest rates. This is an economic
relationship that makes a lot of sense, because lenders expect to be compensated for
inflation, but it is often underappreciated in debates about inflation and the inflation
target. The historical experience shows us we should take this point seriously: in the
1980s the SARB's average policy rate was around 13%. In the 1990s it was nearly
16% - with a lot of volatility, including spikes over 20%, because policymakers
sometimes tried targeting the exchange rate, which is a much more difficult target than
inflation. The repo has averaged 8% over the inflation targeting period, and just 6%
since the Global Financial Crisis. As I always remind people, if you want lower rates,
you need lower inflation. We see this process working once again at the moment: our
forecast model indicates inflation will be close to 4.5% over the next few years, which
is where we want it - in the middle of our target range. Given the weak economy, our
model suggests we might have room to cut rates over the next year or so.
While the SARB recognises the role that macroeconomic policy has to play in the
economy, the primary contribution monetary policy can make to growth is smoothing
output fluctuations over the business cycle. The current challenges constraining
economic growth are primarily structural in nature. To ensure that monetary policy
settings have a sustained positive impact on growth, they should be appropriately
supported by other macroeconomic policies.
The longer-term costs of higher inflation and a deterioration in inflation expectations
have potentially adverse impacts on policy credibility, consumer purchasing power,
borrowing costs, and the global competitiveness of South African firms.
To make a marked impact on potential output and employment levels, what is required
is the implementation of prudent macroeconomic policies underpinned by credible
structural policy initiatives. Tough times call for tough actions.
Monetary policy is not a substitute for structural reform. Price and financial stability is,
however, key to ensuring that any structural reform agenda is successfully
implemented. The SARB remains committed to fulfilling its mandate in this regard.
Conclusion
Allow me to conclude.
Many of the existing and emerging challenges confronting the global economy today
require the strengthening of cross-border cooperation. We therefore need to
strengthen our resolve to seek rules-based multilateral solutions. In a highly
interconnected world, unilateral action, especially in the systemically relevant
economies, is not the solution to fixing trade imbalances. Instead, it undermines
confidence, increases adverse spillover effects, and ultimately reduces global growth.
Central banks and monetary policy have come under increased attention around the
world recently. There are expectations that monetary policy should shoulder more
responsibilities in addressing growth constraints. However, these expectations need
to be based on the constitutional or legislative mandates of central banks. They also
need to acknowledge the merits of central bank independence in safeguarding
macroeconomic and financial stability, which is key in ensuring that the economy is
on a sustainable growth path.
In this regard, I would like to reiterate that the SARB remains committed to fulfilling
its primary mandate of maintaining price stability in the interest of balanced and
sustainable economic growth. In addition, we will pursue this objective 'without fear,
favour or prejudice', as the Constitution calls upon us to do so.
Thank you.