Reserve Bank waits for clear US policy indicators
LESETJA Kganyago, the SA Reserve Bank Governor, speaks with Bloomberg Television’s Francine Lacqua at the World Economic Forum in Davos, Switzerland.
Francine Lacqua: We’re four days from the inauguration. What does a Donald Trump presidency mean for South Africa?
Kganyago: It’s difficult to figure out exactly what it means, because we’re not clear about what the policy is. But there are a number of scenarios that one would have to look at. There’s been talk of a fiscal stimulus. If there is a fiscal stimulus, you would like to believe that the US authorities will do a fiscal stimulus that will be in the best interest of the economy. And if it is true, the US economy growing… would lead to an appreciation of the dollar. And (an) appreciation of the dollar will have a couple of impacts on the emerging market economies.
Lacqua: But governor, we heard from Donald Trump saying that he’s worried about a US dollar which is too high. Again, how difficult is it for you to look at levels of the rand and inflation when you have a US president – soon to be president – that can actually move currency with a tweet?
Kganyago: Well, presidents move currencies all the time, it’s just that this one uses Twitter. Others used ordinary speeches and other platforms. What we are facing now is an increasing environment of uncertainty which makes determining policy a significant challenge. Especially the way we do not know where the actual policy is actually going.
Lacqua: So what is your prognosis for the rand at the moment? And if we have a sharp devaluation can that really spur inflation in South Africa?
Kganyago: Well, in a way, the way in which we look at the impact of a possible US fiscal stimulus, the channel that we looked at were the channels very similar to those of the normalisation of US monetary policy. That it would lead to an appreciating dollar which would lead to a re-alignment in exchange rates globally. And from a monetary policy perspective, what we would then be watching is whether the depreciation of the currency fits itself into a domestic price formulation. The situation gets complicated by the recent agreement by Opec, because that meant that the oil price also began to rise.
Lacqua: Governor give me a level. What is the level on rand dollar that actually feeds through inflation?
Kganyago: Well I wish we knew. Because if we knew then… Lacqua: Or a range. Kganyago: Well, if we knew we’d just plug it into the model and go with it. The thing here to realise is that there is more than the exchange rate that drives inflation. You have got food prices, you have got the oil price. We have for a long time been working on a pass-through co-efficient of 0.2 that a 10 percent depreciation of the rand would lead to a rise in inflation of 0.2 (percent). But that pass through has been relatively muted, not just for South Africa, for the entire emerging market universe. So models have to be recalibrated.
Lacqua: Right, but governor what does that mean for actually setting monetary policy? Does it mean that you’re more in a wait-and-see mode as you figure out all these divergences and complications that you’re talking about?
Kganyago: No. What we spelled out was that we are on a tightening cycle for monetary policy. And we spelled out that the factors that drive inflation actually mean we might be reaching the end of the tightening cycle. Lacqua: Right. Kganyago: We didn’t say we have reached the end of the tightening. We might be reaching the end of the tightening cycle. But we also cautioned that should the factors that have led to the stance that we have, the MPC will then review it’s stance in the light of that.
Lacqua: I know, but you’re saying, and again I know it’s word for word, but that you may be close, right, to ending the rate hiking cycle? Kganyago: Yes.
Lacqua: Are you less close now to ending that than you were a couple of weeks ago? Because of the latest tweets and policies from Donald Trump?
Kganyago: Well, we will know next week if it has changed. We will see if (there is) a new forecast from the staff, we will have significant deliberations, we will assess all of these factors. All I’m saying is that it becomes more complex if we do not know what’s happening with the world’s largest economy.
Lacqua: OK. How much, and I don’t know whether you want to give me a percentage, but how much do you think the impact of US interest rates actually has on your monetary policy?
Kganyago: We do not follow US interest rates basis point for basis point. We only monitor US monetary policy to the extent that it would have an impact on the exchange rate, which has an impact on capital flows to emerging markets in general and to South Africa in particular. And if we believe it would lead to a rise in inflation, monetary policy, we’ll react. By the way it could also work in the other direction.
Lacqua: You talked about animal spirits. One of my favourite words when you talk about central policy, central bank policy, do you believe that there are more risks to inflation, to the inflation outlook that you talked about in November now than there were two months ago?
Kganyago: We will assess that next week. But in November we did say that the risks of the inflation outlook is on the upside.
Lacqua: And if you listen to the rhetoric about protectionism, this should have risen further. Is that a fair assessment?
Kganyago: Well that should be a (inaudible) and in a way the fact about protectionism, you know there is the thing to countries talking about wanting to protect their own market. It’s so illogical – you want to protect your own market, but you want access to the markets of other countries. And one loses really what the logic is. What is of concern about the noise about protectionism is that it is coming out of the world’s largest economy and should it materialise, you will have (to) expect (that) the other developed economies to retaliate. And if they retaliate we are going to face a situation where global trade declines. And when global trade declines, you are going to have a significant impact on the livelihood of the majority of people in emerging market economies.
Lacqua: Which means that inflation goes up. What’s the likelihood of that scenario? Is it 25%? Is it 50%?
Kganyago: You know, the problem with that scenario is that you are getting into the realm of analysing what politicians would do.
Lacqua: OK. A last question on growth, OK? Is your expectation on growth of the South African economy changing because of all this talk on protectionism?
Kganyago: It would have an impact. At the moment it’s difficult to say what the impact is, because you do not know what protectionist measures will come. Because different countries will be impacted differently. Our concern from the African continent for example is that if these fears about protectionism materialise, the biggest US policy engagement with the African continent on the trade side is the African Growth Opportunities Act. If not the benefit in terms of Agoa are repealed or are removed or are minimised, there’s got to be significant impact on African economies. Agoa led to significant benefits for African economies.
Lacqua: Governor, a very quick last question on political turmoil in South Africa. Are you worried for 2017?
Kganyago: Well, we always worry about noise. South Africa is a very vibrant democracy. And some people even say that it’s actually a noisy democracy. These conversations take place in the greatest of democracies. The nicest thing is that we are not killing each other. We are having civilised discussions about it.
Lesetja Kganyago, the governor of the South Africa’s Reserve Bank, speaks during a Bloomberg Television interview at the World Economic Forum.