Battle over South African Reserve Bank’s role spooks rand

A fight is brewing over South Africa’s Reserve Bank and Governor Lesetja Kganyago is ready for it, flanked by his finance minister and the head of the ruling party’s economic policy.

The rand whipsawed Wednesday amid confusion over whether the ANC is pushing to change the Reserve Bank’s mandate and to use the institution to rescue state-owned companies. While Secretary-General Ace Magashule said its role must be expanded, Tito Mboweni and the ANC’s head of economic transformation, Enoch Godongwana, said no resolutions were made on the Reserve Bank at a party meeting last weekend.

Speaking in an interview hours before Magashule press briefing on Tuesday, Kganyago said that the Reserve Bank’s independence is enshrined in the constitution. He reaffirmed the bank’s mandate to fight inflation, made it clear the institution by law can’t provide unsecured credit, and that it won’t step in to bail out government-run companies.

“Where does the Reserve Bank get the money?” Kganyago said in an interview with Bloomberg News at his office in the capital, Pretoria. “We’ll have to print it.” There would be a lot of money “chasing very few goods” in South Africa, he said. “That is the classic definition of inflation. It will not take long for inflation to really tick up.”

Policy Confusion

The tussle within the ANC to get the Reserve Bank to play a more active role in stimulating economic growth is complicating President Cyril Ramaphosa’s efforts to reverse the worst slump in a decade. At the same time, the government has run out of fiscal runway to keep state companies afloat, with the debt of power utility Eskom alone amounting to almost a 10th of the country’s gross domestic product. GDP contracted 3.2% last quarter.

Bailouts by the Reserve Bank won’t work “because then not only would you have monetised the deficit, you have now sucked the Reserve Bank  into making fiscal decisions,” Kganyago said. “It is not something that the Reserve Bank is not designed to do.”

The finance minister agrees. “There is no quantitative-easing thing here,” Mboweni wrote on Twitter late on Tuesday. Quantitative easing usually refers to a relaxation of monetary policy achieved through the purchase of longer-term securities by the central bank.

No changes

Mboweni was responding to the ANC secretary-general’s comments that the party had directed the government to consider “constituting a task team to explore quantity easing measures to address intergovernmental debts to make funds available for developmental purposes.”

Changes to the Reserve Bank’s  mandate won’t be done by the ANC, but by the government, Pule Mabe, the ANC’s spokesperson, said. The ANC hasn’t retracted the statement issued by Magashule on Tuesday and if “cadres have different views they are welcome to express their views,” he said. Both Mboweni and Godongwana sit on the top decision-making body and said no deliberations took place over the Reserve Bank.

“I was shocked myself when I heard the ANC’s statement,” Godongwana said by phone on Wednesday. “There will be no changing of the South African Reserve Bank (SARB) mandate.”

The Reserve Bank’s monetary policy committee targets keeping inflation at between 3% and 6%, with the band set by the government. It’s primary objective “is to protect the value of the currency in the interest of balanced economic growth and development,” Mboweni said. South Africa’s inflation currently is 4.4%.The rand weakened as much as 1% against the dollar before paring losses to trade little changed at 14.6789 per dollar by 11:36 in Johannesburg. It dropped 1.5% on Tuesday.

“Nobody is talking about changing the mandate of the South African Reserve Bank,” Mboweni said on Wednesday. “Why do we say things we know are going to destabilise the markets?”

In a market update on the rand’s movements, Investec economist Annabel Bishop noted that the “confusing messages” from the ANC on Reserve Bank’s independence would stall the rand’s nascent recovery.

“After managing to strengthen to R14.40/$, earlier yesterday in a winning streak from 29th May, the domestic currency then lost all of these gains, reaching R14.83/$ on an announced change in the ANC stance to one of potential interference in the Reserve Bank’s independence.”

The markets reacted negatively to ANC comments about quantitative easing as fears of hyperinflation and a Zimbabwe/Venezuela style economic collapse came to mind, Bishop commented.

Despite Mboweni’s efforts to allay fears resulting from the statements on the SARB, the rand has failed to recover substantially, she added.