/ 11 June 2019

SA’s monetary policy needs a serious overhaul

The roots of the Reserve Bank’s orthodox monetary policy are three decades old.
The roots of the Reserve Bank’s orthodox monetary policy are three decades old. (Gallo)


The call by the ANC’s Luthuli House to loosen monetary policy was both clumsy — in process, terminology, tweets and even scope (with its focus on nationalisation, something of a red herring) — and perhaps worse, fatally associated with the Ace Magashule faction at a time the party’s secretary general is facing serious charges of Gupta-related corruption. (He promises a libel lawsuit against one accuser, journalist Peter-Louis Myburgh, but has so far not delivered his rebuttal.)

You may want to shoot the messenger, as do nearly all media commentators and bankers so far. But what about the message?

After all, is it appropriate that South African monetary management has landed us with an interest rate that today, among the major countries issuing 10-year securities, is higher than all others (including Venezuela) aside from Turkey, Pakistan and Argentina? Are we engaged in unnecessarily risky international financial behaviour, at a time of dangerous global market turbulence? Should future generations be carrying the vast weight of our inflated financial assets — especially debt loads and overvalued shares — resulting in the relative doubling of the finance, insurance and real estate sector in the economy since 1994?

Even if Luthuli House has muddied these waters in last week’s lekgotla dispute, nevertheless can we find the courage to look critically at the South African Reserve Bank and treasury, and examine flaws in their monetary policy, financial sector regulation and international debt management?

State capture by neoliberal financiers

The pro-rich bias in the Reserve Bank and treasury dates back more than a quarter century. When white capital broke from the white state to join forces with the neoliberal factions of the ANC during the early 1990s, this was an opportunity to shape financial policy in their interest, as one of the central means of restoring profitability.

The demise of the Soviet Union had removed all confidence from the ANC’s left factions, as neoliberals parachuted in to guide policy. In late 1993, an International Monetary Fund (IMF) loan of $850-million had cemented the apartheid government’s economic strategy.

When treasury was awarded an investment grade by credit ratings agencies in 1994, Pretoria was subject to much greater international financial pressure.

During the 1990s, several other macroeconomic compromises included repayment of apartheid-era foreign debt; cuts in the primary corporate tax rate from 56% to 38% during the 1990s (and then down further, to 28% today); falling customs duties and tariff revenues once South Africa joined the World Trade Organisation on adverse terms in 1994; and the decision to allow wealthy South Africans to remove their apartheid-era capital to offshore sites.

The latter entailed the 1995 closure of the financial rand (finrand) dual-currency exchange control system, mainly liberating the richest South Africans to remove their wealth forever, and the 1999 to 2001 permission given to some of the largest firms on the JSE — AngloAmerican, De Beers, Old Mutual, SAB/Miller, Mondi, Investec, Didata — to relist their primary financial homes in London and New York. Earlier, individual permissions to remove apartheid-era capital had been given to BHP Billiton (formerly Gencor) as well as Liberty Life insurance.

As a result of the corporate chicken run, the current account deficit soared after 2001, mainly as a result of profit and dividend outflows associated with the relisting of major firms on the foreign stock markets. To cover these outflows, much higher levels of foreign indebtedness were then required to pay that outflow.

The inherited $25-billion foreign debt (of all borrowers) soared to more than $183-billion by 2018. And this, in turn, required South Africans to pay a higher real interest rate than ever before, a premium paid long before junk ratings were imposed by Standard & Poor’s in April 2017.

Worse, further outflows are occurring at a more rapid pace, in the wake of the February 2018 decision by treasury to permit an additional R500-billion of institutional investor funds to move abroad (exchange controls on these funds were relaxed from a 75% to 70% local investment requirement).

Yet, with just $50-billion in reserve holdings of hard currency, the IMF in 2018 correctly termed these “below adequacy” by at least 30%, warning: “External risks include large gross external financing needs, and a current account deficit financed by flows that are prone to sudden reversals in response to abrupt changes in global financial conditions and sovereign credit ratings.”


The roots of the Reserve Bank’s orthodox monetary policy are three decades old. Historically, the late 1980s witnessed a sharp turnaround from counter-cyclical to pro-cyclical monetary policy, once a neoliberal — Chris Stals — replaced a more politically-sensitive Reserve Bank governor (at crucial moments, Gerhard de Kock had kept rates low to please the Pretoria regime).

The dramatic rise in real interest rates in 1989 was exacerbated in 1995 by the finrand liberalisation: to compensate for the outflows (benefiting the wealthiest), the Reserve Bank’s high returns to inflows hurt all debtors. Those included a new (often first) generation of black borrowers, and the April to September 1998 crash of the Black Chip shares on the JSE was even greater than the stock market’s overall 45% fall from peak to trough.

As the crash unfolded and Tito Mboweni was selected as Stals’s understudy and eventual replacement, the currency also collapsed, confirming the fragility in emerging markets. After spending the country’s hard currency attempting to defend the rand’s value, Stals gave up and instead simply raised interest rates by 7% in two weeks.

The shock rise followed a steady increase in the real interest rate the Reserve Bank charged its own borrowers (the repo, or repurchase rate) from 2.5% in 1993 to 12.5% in 1998. That increase exacerbated bankruptcies (the repossession rate) for black business borrowers who had collateralised their debts with stock market shares.

(To be sure, the opposite philosophy, monetary laxity, was being practiced next door in Zimbabwe by a Reserve Bank governor, Gideon Gono, who was then-president Robert Mugabe’s personal banker. From the early 1990s until 2009, the effect was a degeneration of the currency’s value to the point it was replaced by the US dollar, after a bout of intense hyperinflation.

The extent of Reserve Bank “independence” is mainly a euphemism for the extent to which the individuals in charge are committed to protecting the currency’s value against inflation, which in Gono’s case was secondary to lubricating the Mugabe patronage machine.)

Interest rate management is not only aimed at keeping money inside the country. In orthodox hands, a monetarist perspective considers money supply the driver of internal prices.

Thanks to the Reserve Bank’s high interest regime since 1995, inflation never reached the levels of the 1980s, and indeed in recent years, consumer price inflation was reduced to 5.1% for the wealthiest fifth of the population over the 2009 to 2017 period. (The poorest suffered up to 2.5% higher-than-average inflation in this period, however.)

But the real interest rate — that is, prime minus inflation — has averaged more than 5% since the early 1990s, and measured against the Reserve Bank’s repo rate, PwC points out that our real interest rate is now eight times higher than it was in 2016.

Another aspect of monetary management (considered in the broadest terms), is the financial system’s supervision and regulation. The quantitative easing loose-money strategy adopted by the North’s central banks from 2009 to 2015 was based, first and foremost, on ensuring banks would survive the Great Recession, and second, on the need to artificially inflate economic activity by purchasing state securities from banks, so as to encourage lending.

South Africa also faces potential bank failures, even though there are a half-dozen very large banks which today meet the Basel capital adequacy standards. That can change quickly, as the United States Federal Reserve learned with its “too big to fail” banks.

Deregulatory mania

Pretoria’s supervision and regulation of the financial system has always received praise from the World Economic Forum’s Global Competitiveness reports, usually ranking in the world’s top ten. But in reality, there are major problems, as witnessed in the delinking of the South African financial system from the real economy.

For example, South Africa’s stock market overvaluation is the world’s worst, measured using the Warren Buffet Indicator. By that measure, which is a national stock market’s aggregate share value to gross domestic product (GDP), the JSE grew rapidly through January 2018, reaching a ratio (350%) higher than any other ever measured, 3.2 times higher than the world average.

Were there political will, government could have imposed Tobin tax disincentives for financial transactions above a certain value. In contrast, some of the main regulations pertaining to financial capital were deregulated, sometimes even out of existence. These included the finrand dual exchange rate to penalise offshoring; the corporate listing requirements; the building societies’ domination of home mortgage bond lending; and the very existence of the major insurance companies Old Mutual and Sanlam as mutual societies.

In the case of usury rate protections against excessive interest rates (especially on small loans), major exemptions were made to existing regulations.

Along with the relatively high interest rates paid to savers because of conservative monetary policy, financial deregulation intensified inequality as wealthy South Africans externalised their assets and as the mutual ownership that had preserved working-class wealth for generations suddenly reverted to private ownership of existing shareholders.

Several banks that were on the verge of failure were merged thanks to a generous Reserve Bank bailout loan, creating the Amalgamated Banks of South Africa. (Smaller banks were not so fortunate, because no bailout was considered for the African Bank or VBS Mutual Bank in recent years.)

Pension funds that required longer-range investment consideration were converted to provident funds that could be drawn down by beneficiaries overnight.

Moreover, the degree to which the regulators’ oversight was inadequate to the task of maintaining financial system coherence was illustrated repeatedly by banking scandals. For example, illicit financial flows unveiled by data leaks — scores of rich South Africans, other people and firms named in the HSBC, Panama Papers and Paradise Paper scandals from 2015 to 2017 — were never acted on.

Illicit flows were estimated at $21-billion annually for 2004/2013 by think tank Global Financial Integrity, reaching 23% of GDP in 2007 alone. Pretoria’s regulation of base erosion and profit shifting, misinvoicing, transfer pricing and other tax dodges appears nonexistent. Cyril Ramaphosa, before re-entering the political arena, was regularly implicated in billions of rands worth of Lonmin, MTN and Shanduka financial offshoring to zero-tax havens, including Bermuda and Mauritius.

Moreover, at least 17 banks were involved in the manipulation of foreign currency transactions, and prosecution is tardy. The scandal’s exposure in 2016 occurred in the Competition Commission, not the treasury or Reserve Bank. Meanwhile, the financial accountancy and advisory profession became a laughingstock, for repeatedly giving positive ratings to companies Steinhoff, Tongaat-Hulett, VBS Mutual Bank and African Bank.

Supervision and regulation were also mostly missing when it came to consumer indebtedness, until the 2005 National Credit Act tightened lending requirements. But inadequate protection against informal lenders remains a major problem because, with a lower share of the post-apartheid national surplus going to labour as opposed to capital (a 7% relative decline from 1994 to 2016), the working class became overindebted.

The crisis year was 2008 because of rapid interest rate increases, although they were then partly reversed as the global financial meltdown unfolded. In 2004, household debt/GDP was 55%, but soared to nearly 90% in 2008, before declining to 70% today — still a dangerous level.

In 2017, the National Credit Regulator recorded nearly 25-million credit-active consumers, of whom 15-million “were in good standing, while the balance of 9.69-million (39%) had impaired records”.

Indeed, the debt of the bottom decile of the population rose to a full third of household asset value by 2015, while for the top decile it was only 9%. Differential pricing of financial services means that wealthier borrowers pay lower rates (and get higher rates when savings), compared with the micro-finance industry that lends to poor and working-class people. The IMF study of financial markets confirms that “bottom quintile households account for 33% of loans from ‘mashonisas’ (higher-cost informal lenders) compared to 8% for the top quintile”.

In short, the monetary and financial management of South Africa’s economy has been characterised by extremely high interest rates, capital flight, supervisory laxity, deregulation, corporate corruption and excessive financial speculation.

Luthuli House may have distracted this debate from the underlying conditions, but inevitable capitalist financial crises will necessarily force us to return to think through these deeper dilemmas, one day soon. Shooting the messenger might make the financiers and hacks feel good, but critical messages about inappropriate monetary policy and excessive financial deregulation won’t die.