South Africa’s central bank governor has defended its response to the coronavirus economic downturn in Africa’s most industrialised nation in the face of growing calls from politicians and trade unionists to deepen its rate cuts and buy up more government bonds.
South Africa, which has recorded more than half a million infections to date, is facing its biggest downturn in 90 years this year as industry slowly reopens from restrictions.
The lockdown has devastated an already moribund economy, reeling from persistent power cuts and a lack of investment even before the pandemic. The governing African National Congress of President Cyril Ramaphosa wants the bank to take a more direct role in stimulating growth.
But the South African Reserve Bank “has been the most aggressive” bar few other central banks in developing economies, Lesetja Kganyago told the Financial Times in an interview. SARB has cut its benchmark rate by 300 basis points to 3.5 per cent over the course of this year, with the latest downward shift on July 24, as infections and a strict lockdown have battered South Africa’s economy.
Mr Kganyago said the policy rate, now at its lowest in nearly half a century, was also now negative in real terms versus where inflation is expected to be in the next year, showing the bank’s “substantial” response.
Inflation recently fell below the bank’s target range of 3 to 6 per cent, yet analysts anticipate just one more 25bp rate cut this year.
“I challenge anybody who’d dare say that the SARB has not done enough, and I would say by what measure — because when you see the measures that the SARB has taken, we can compare it to our peers,” Mr Kganyago said. The bank “has room to respond” if inflation is persistently under target, he added.
“Of course, there could always be central bankers who are pliable, who could overlook their responsibilities in terms of the constitution, but this one is not about to,” he said.
In its plan for South Africa’s post-pandemic economy unveiled last month, the ruling ANC said that the central bank “must be better co-ordinated with fiscal policy” and should pursue “pro-growth and pro-investment” monetary policies, in what was seen as pressure on the bank to do more to stimulate the economy. David Masondo, the deputy finance minister, has said he is not opposed to greater bond buying by the bank. Meanwhile, trade unions have called for the bank to intervene more in the economy.
The pandemic has shown “the role the monetary authorities can play in injecting resources into the economy and in using bond purchases to stabilise capital markets and put downward pressure on longer-term interest rates”, the ANC’s plan said.
There have been calls from unions and some economists for the bank to adopt quantitative easing — buying government bonds directly to stimulate the economy. Its limited purchases to date targeted disruptions in the South African bond market that emerged in March at the height of the pandemic’s global financial turmoil. The bank only had to buy about R30bn ($1.7bn) of bonds between March and June because the signal that it was prepared to make purchases helped ease market conditions.
Full quantitative easing was not necessary as South African rates remain above the point at which other central banks have generally had to adopt QE to get their economies moving, Mr Kganyago said.
But the SARB is under growing pressure from parts of the ANC to directly fund the government, or accept high inflation in order to reduce the real value of its debts, as the public finances, already bloated by years of bailouts for inefficient state companies, are set to deteriorate further in coming years.
In a reflection of the strain on South Africa’s borrowing costs, the country last month took a $4.3bn low-cost loan from the IMF to help fund its response to the pandemic.
At about 16 per cent of GDP, this year’s budget deficit is expected to be larger than South Africa’s annual pool of domestic savings, burdening local appetite for government bonds.
At the same time it has become harder to attract foreign investors to South Africa’s sovereign debt market after the country lost its last investment-grade credit rating earlier this year. Foreign ownership of local-currency debt is about 30 per cent, the lowest in almost a decade, according to data.
As a result, “South Africa is at risk of fiscal dominance” or pressure on the bank to find ways to ease the load on the government’s finances, Mr Kganyago said. But there are strong institutional safeguards to prevent that, including the central bank’s independence and its constitutional mandate to deliver stable prices, he added.
Even if a pliant central bank did agree to stoke inflation for fiscal reasons, it would not help the government with its finances, Mr Kganyago said. Hundreds of billions of rand of bonds of state debts are linked to inflation, and pay out more if prices rise. “Trying to inflate the debt away is not an option,” he said.