New governor designate of the SA Reserve Bank
The new governor designate of the South African Reserve Bank (SARB), Lesetja Kganyago, has a tough road ahead of him, but economists and banking sector leaders believe he is the right man for the job.
Kganyago takes the reins as monetary policy globally is beginning to normalise after a period of unprecedented change. It has been characterised by very low interest rates in developed countries and the use of programmes such as quantitative easing – the purchase of securities by central banks in a bid to pump liquidity into financial markets – following the financial crisis.
South Africa, like many emerging markets, has not been left unscathed by global monetary policy developments, which have contributed to high levels of currency volatility.
At the bank’s helm, Kganyago must also navigate rough local waters. These include steadily rising inflation, which at 6.4% has breached the SARB’s target of between 3% and 6%, as well as lacklustre economic growth and a widening current account deficit.
The Reserve Bank is also intimately involved in the rehabilitation of African Bank, after the unsecured lender came to an almost total collapse in early August, which sent shock waves through the local financial sector.
President Jacob Zuma announced Kganyago’s appointment in Pretoria on Monday. He will succeed outgoing governor Gill Marcus on November 9. The former director general of the national treasury, who joined the central bank as a deputy governor in 2011, was widely deemed the frontrunner for the post by both local and international analysts.
Testing times
Kevin Lings, chief economist at Stanlib, said it was a difficult time for Kganyago to take up the role, but believed he had both the experience and the “political knowledge” to manage the pressures he was likely to face. Internationally, it was a time of normalising monetary policy and South Africa “will be pushed and pulled by global events”, said Lings.
The coming months would test the resolve of many central banks to return to positive real interest rates, according to Lings. This was particularly relevant to a society like South Africa, where high levels of poverty and unemployment increased pressure to maintain looser monetary policy and keep interest rates low.
“But he [Kganyago] will be aware of these pressures and has the political knowledge to deal with them,” said Lings. It was also a particularly testing time as South Africa still faced reviews from a number of credit ratings agencies, he noted.
Lings believes Kganyago is willing to express independent views but his experience in the state meant he could co-ordinate efforts with broader government.
According to a statement from the presidency, aside from his time at both the Reserve Bank and the Treasury, Kganyago has served as economics co-ordinator and accountant for the ANC as well as accountant to trade federation Cosatu.
Kganyago has also done extensive work in global forums such as the G-20 – where he has led South Africa’s technical team to various G-20 ministers of finance and governors’ meetings. This experience meant he was well known to international investors and credit ratings agencies and the work of both Kganyago’s predecessors, Tito Mboweni and Gill Marcus, would stand him in good stead, Lings added.
‘Harsh medicine’
The SARB has built up its credibility, thanks to Mboweni’s legacy of entrenching inflation targeting policy, and Marcus’s efforts to improve and open up the SARB’s communications.
Kganyago would need to continue to enforce these efforts, said Lings, and would also have to “administer some harsh medicine” in the form of gradual interest rate increases.
Sanlam economist Arthur Kamp said Kganyago would adhere to inflation targeting and the maintenance of financial stability.
Recent comments made by Kganyago during a speech in late September had a “hawkish undertone”, Kamp pointed out. In the speech given in Cape Town, Kganyago said: “Ultra-low world rates were the right policy response to a global economic catastrophe; rising rates are a sign of a healthier world economy, which will help to realign investment decisions around long-term growth prospects.”
He continued by saying that “credible monetary policy – moving back within the inflation target – will help moderate volatility and facilitate SA’s adjustment to US policy normalisation … Monetary policy must retain and strengthen its focus on inflation. In doing so, we will push the envelope of transparency and clarity wherever possible; to help ensure that inflation expectations do not drift from the target”.
Remarks such as these suggested he would be a governor that would maintain current monetary policy trajectory and “won’t hesitate to do what he needs to do” when it came to inflation targeting, argued Kamp.
Meanwhile Cas Coovadia, head of the Banking Association South Africa, said the organisation was “very, very happy” with the appointment. Kganyago had been at the treasury a long time, before joining the reserve bank, and had a good understanding of the broader dynamics facing the banking sector. “He is an excellent choice and we look forward to working with him,” said Coovadia.