Re­serve Bank waits for clear US pol­icy in­di­ca­tors

The Star Early Edition - - OPINION&ANALYSIS - Bloomberg TV In­ter­view (EDITED TRANSCRIPT)

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.

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