Heed Turkish fright, says Reserve Bank boss
Meddling with central bank a recipe for disaster — Kganyago
● The central cause of Turkey’s financial crisis, which has fed fears it would spread to other emerging-market economies such as SA, was credibility, said Reserve Bank governor Lesetja Kganyago.
The lesson for South Africans is those “who think that they would like to meddle in a central bank, they only need to look at Turkey and see what the consequences of meddling with a central bank are,” he said in an interview with the Business Times.
Turkey’s deepening currency crisis is largely self-inflicted and centres on the concentration of decision-making in the hands of its populist president, Recep Tayyip Erdogan, who has taken over monetary policy from the country’s central bank with his unorthodox economic views.
Erdogan, who recently won re-election, believes that high interest rates are inflationary, so despite a currency that has weakened 35% this year the central bank hasn’t raised rates.
Raising rates is the only tool central banks have to protect the value of a currency.
“You can look at Argentina too, where the meddling with a central bank led to a collapse in their currency,” Kganyago said. The Argentine peso is 37% weaker against the dollar and the country has sought an IMF rescue package.
In the build-up to last year’s ANC elective conference, factions that backed former president Jacob Zuma had called for the nationalisation of the Bank as part of “radical economic transformation”. One of the ANC resolutions after the conference was for the nationalisation of the Bank.
On Thursday EFF leader Julius Malema introduced a bill in parliament to nationalise the Bank.
Some critics of the Bank, along with labour unions, had complained that the bank had focused on inflation and raised interest rates instead of promoting employment. SA’s unemployment rate is over 27%, the highest of nations tracked by Bloomberg.
In July 2017, the Bank made its first rate cut in five years.
Kganyago has been critical of calls to nationalise the Bank due to the cost implications for a desperate state and also as it doesn’t affect the Bank’s constitutionally bound mandate to target inflation. The Bank has a range of 3%-6%.
While economists and analysts this week raised the prospect of SA coming under the same levels of scrutiny as Turkey has in re- cent weeks, the governor believes the circumstances simply aren’t the same.
The rand has been at the centre of the firestorm around the Turkish economy over the past two weeks.
The Turkish lira and Argentina peso are about the worst-performing emerging-market currencies against the dollar this year with inflation running into double digits.
Politically, Turkey has also found itself in the middle of a dispute with US President Donald Trump who has placed tariffs on its exports because of the detention of a US pastor.
While the Turkish lira staged a recovery late in the week, it is now 15% weaker against the dollar for the month of August.
The rand, which is one of the world’s most traded emerging-market currencies, in
We have got some resilience to weather the storm Lesetja Kganyago
Reserve Bank governor
turn breached R15 to the dollar earlier in the week and is trading at its weakest levels in two years. If prolonged, it’s a weakness that may feed into higher inflation.
Inflation is anchored at the mid-point of the target range and despite risks it is expected to remain within target, providing a cushion and less pressure to hike rates in the near term, Kganyago said.
Economists expect the Bank to raise rates in the first quarter of 2019.
While no-one can call just how long the current sell-off in emerging-market assets will continue, Kganyago said: “SA is not Turkey.”
While Turkey’s fiscal accounts and debt to GDP were “pretty decent”, the country’s dollar-denominated sovereign debt, and its corporate and individual debt, was high.
“This then makes the impact of the exchange rate not just an inflation issue but also a financial stability issue.”
The depreciation of the currency leads to rising debt for corporates and individuals.
The South African government’s dollardenominated debt amounts to less than 10% of overall debt, with the rest in rand. South African corporates aren’t as highly exposed to US debt as their Turkish peers, which gorged on low interest rates in the world’s largest economy.
Kganyago isn’t surprised by the sell-off in emerging-market assets such as currencies and equity markets. The bank foresaw these scenarios as far back as 2013 when the US Federal Reserve first signalled it would start tightening monetary policy, by first reducing stimulus and thereafter increasing rates.
After the 2008 global recession, the Fed dropped interest rates in the US to record lows and printed money through quantitative easing to boost its economy.
With the normalisation of US interest rates, he said, there was bound to be a reversal of capital flows from emerging markets into the developed world and the re-pricing of assets. “What we didn’t know is that this could be triggered by political events,” he said of the US decision to impose higher tariffs on Turkish steel and aluminium because of a jailed pastor.
When the Fed signalled an end to stimulus injections five years ago, SA’s budget deficit hovered above 5%, inflation was outside the target range and the currentaccount deficit was above 6% of GDP. This saw SA classified as one of the “vulnerable five” economies that included Indonesia.
While the Bank expected SA’s currentaccount deficit at about 4% this year, Kganyago says the local situation was much better. The rand’s weakness may mean a further decline in imports, which means an improvement to the deficit.
“We have got some resilience to be able to weather the storm,” he said.
SA’s current-account deficit is lower than Turkey’s. The current-account deficit is a measurement of a country’s trade where the value of the goods and services it imports can be larger than those it exports.