Investors shrug off Reserve Bank fears
South Africans may harbour fears about the independence of the Reserve Bank after the ANC affirmed its position to nationalise the Bank. But international investors view the rhetoric as political noise.
The security of the Bank's independence and its credibility have been in the spotlight months after Turkey's central bank faced its own test of independence, plunging the lira and other emerging-market currencies into a tailspin.
Last year, the delay by Turkish monetary policymakers to hike interest rates amid inflation of nearly 18% raised concern that the country's president was tightening his grip on what was once one of the developing world's more respected central banks. Meanwhile, in March last year, New Zealand added a requirement that its central bank consider employment growth when making monetary policy decisions.
President Cyril Ramaphosa said at a briefing this week that the ANC had simply expressed a "wish" and an "ambition" in its pre-election manifesto, released at the weekend, to nationalise the Reserve Bank, and the Bank's independence would remain "sacrosanct". This was premised on the party's view that the Bank should maintain flexibility in its quest to contain inflation to between 3% and 6%, in the interests of job creation and economic growth, Ramaphosa said.
Central banks in some developed countries, such as the Bundesbank in Germany and the Federal Reserve in the US, are national institutions, yet operate independently from the government.
Reserve Bank governor Lesetja Kganyago was adamant on Thursday, after announcing that the repo rate would be held at 6.75%, that it was impossible to have balanced and sustainable growth in a country with imbalances such as SA's high unemployment rate of 27.5%. "Our mandate as the South African Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable growth. Anyone who says that the Reserve Bank must focus on growth has clearly not read the constitution," he said.
The Bank's primary mandate is enshrined in the constitution. Support from parliament and opposition parties would be required to change this.
Piotr Matys, Rabobank's emerging-market foreign-exchange strategist, said: "Turkey is a very good example of how important the independence of the central bank is for investors. Any signals that the independence of the central bank could be reduced, or any signals of political interference in monetary policy, tend to weaken the national currency."
For any country wanting to widen its central bank mandate to include growth support, "it's absolutely crucial that the country has very strong economic fundamentals, and that cannot be really said about SA", he said.
"It would be, from the perspective of foreign investors, far more productive if the administration focuses on reforms to strengthen the South African economy and then perhaps considers widening the central bank mandate."
Razia Khan, MD and chief economist for Africa and the Middle East in Global Research at Standard Chartered Bank, said the Reserve Bank had repeatedly emphasised that a change of shareholding could not affect operations and would be futile. "That message has landed with international investors, so this is something that they are less spooked by. On the ANC election manifesto, what did help was President Ramaphosa coming out with the clarification almost immediately, saying the independence of the Reserve Bank is sacrosanct," she said.
Kganyago told reporters: "When you talk about changing the mandate of the Reserve Bank you talk about changing the constitution." He said South Africans should be thankful that "it is written into the constitution rather than being left to the [Reserve Bank] Act, [which] can be changed with ease".
Khan said: "I think this Reserve Bank - to give it credit - has done a lot to underscore its credibility. That is why the political noise in the system is seen for just that - noise."
The Reserve Bank has about 650 shareholders. No shareholder may hold more than 10,000 shares. The dividend payable is limited to 10c a share each year, which equates to about R200,000 a year. There are 2-million issued shares and the National Treasury has no provision for a buyout of shareholders.
Khan said: "The best pro-poor policy that SA can have in place - and this is something that governor Kganyago has made very clear on many occasions - is price stability because it is the most vulnerable who are hit hardest by inflation when it takes root."