Rising above the noise

18 Jun 2019

Karen Meyer

Writer, Investec Private Banking

Governor Lesetja Kganyago, Ferial Haffajee and Chris Holdsworth separate reality from the rhetoric regarding SA politics and the economy.

Watch some highlights from the Joburg event

At an Investec In conversation event titled ‘Rising above the noise’, a panel consisting of Lesetja Kganyago (Sarb governor), Chris Holdsworth (Investec investment strategist) and Ferial Haffajee (political journalist), debated the various political and economic scenarios, both locally and globally, likely to affect the South African economy, separating the reality from the rhetoric.
 
That very day, top ANC officials clashed over the mandate of the South African Reserve Bank (Sarb) after party Secretary-General Ace Magashule said the mandate of the Sarb will be expanded. However, this statement elicited a firm denial from both Finance Minister Tito Mboweni and ANC head of economic transformation, Enoch Godongwana. Both confirmed that there was no decision to change the Sarb’s mandate.
 
In a tweet, Mboweni said that, “Government sets the mandate for the Sarb. There is no quantitative easing thing here. The primary mandate of the SA Reserve Bank is to protect the value of the currency in the interest of balanced growth and development.”

Watch the full panel discussion from our Johannesburg event

Commenting on these developments, Ferial Haffajee noted that the situation was irresponsible. “If you look at how we were reported in the New York Times, in the Wall Street Journal, in the FT as well, I feel like a whole lot of months and months of hard work was undone and undone quite irresponsibly. Our new found tag line ‘The new dawn’ feels like a distant memory to me.”
 
She added that at the Global Investment Summit last year, president Ramaphosa clocked up R250 billion in investment promises. “So what that tells you is that we were really in quite a sweet spot in a troubled world, and what worries me about this past week is that we’ve become like chokers. We snatch defeat from the jaws of victory.”
 
She also said that it feels like South Africa has an effective ‘five finance ministers’ and it’s extremely confusing. “You have President Ramaphosa running aspects of policy, you’ve got Tito Mboweni the Finance Minister, you’ve got Public Enterprises Minister Pravin Gordhan, very often acting like finance minister. You’ve got Enoch Godongwana sounding like he was the finance minister and then you have Ace Magashule as well. It gets extremely confusing. And I think investors begin sitting on their money, so I think the lines need clarifying. Communication needs certain improvement.”
Ferial Haffajee
"I feel like a whole lot of months and months of hard work was undone and undone quite irresponsibly. Our new found tag line ‘The new dawn’ feels like a distant memory to me."

Ferial Haffajee , political journalist

Listen to the full panel discussion

In conversation with Governor Lesetja Kganyago, Ferial Haffajee and Chris Holdsworth.

Quantitative easing on the table?

An additional narrative that’s being debated is that the Sarb should, through quantitative easing, make funds available through a developmental agenda. Governor Kganyago reiterated that the central bank has a particular responsibility - price stability -  and to embark on a process of quantitative easing, two conditions must be met.
 
The first condition is that inflation must be so low that it threatens to go below zero, in other words, there is a threat of deflation. “With deflation you will kill consumption, because consumers won’t buy today if they could buy tomorrow because tomorrow’s prices will be lower.”
 
The second condition is that the central bank tried to combat deflation to the point where interest rates are close to zero. They had become effective in influencing both investment and borrowing decisions.
 
“Inflation in South Africa is far from zero. It’s 4.4%. Interest rates are not at zero. 6.75% in real terms. Looking forward to the first quarter of next year you are talking of interest rates of 2.75% in real terms. So let’s get this one clear, quantitative easing is not an option in South Africa because we do not meet the conditions for quantitative easing,” he commented.
Lesetja Kganyago
"You cannot beat an economy that is on its knees and force it to create jobs. Jobs are an outcome of economic growth. Absence of economic growth means you can’t have jobs."

Lesetja Kganyago, Governor of the Sarb

He also noted that in the aftermath of the global financial crisis, when the advanced economies embarked on quantitative easing, capital started to flow to emerging markets. South Africa also benefitted from that and we behaved as if we were richer than what we actually were. Not only that, we binged on debt because we were providing a fiscal stimulus.

“It was the correct thing to do at that time. The conversations South Africans should have is who captured that stimulus because it didn’t have the desired effect, because some rent seekers benefited a significant cut.”

Price stability to ensure growth

According to Governor Kganyago, the Constitution gives the Reserve Bank a responsibility on balanced and sustainable growth. In order to have growth, you need to have price stability which inherently means the protection of the value of the currency.
 
He added, “So price stability is a necessary condition for balance and sustainable growth in the Republic but it is not a sufficient condition. You cannot beat an economy that is on its knees and force it to create jobs. It’s not going to happen. You have to bring it up, get the economy to grow. Jobs are an outcome of economic growth.
 
"Absence of economic growth means you can’t have jobs. For you to get jobs you must get growth, for you to get growth you must get investment, for you to get investment you must create an environment for investment to take place, it’s not a scientific discovery.”
 
READ MORE: Why wishful thinking will not solve SA's unemployment problem
 

Burning issues that investors are tracking

The conversation then turned to the burning issues that investors are going to be tracking.

Chris Holdsworth remarked that the two top issues were Eskom keeping the lights on and the uncertainty around land. “We check the energy availability factor every day quite closely. It’s a percentage of the total capacity that is available for production at any given point in time and that number has been pretty low.” He pointed out that there is a definite link between that number and growth in South Africa.

“You can’t get growth in South Africa unless you’ve got an idea of where that energy availability factor is and where it’s going to go. To date, it’s averaging 65% and if it continues, we will grow at a half a percent or so if we’re lucky and everything else remains constant. If it goes to 70% then we can go a bit more.”

He highlighted that Eskom’s over R500 billion in debt and the servicing of that debt remains an issue as there’s no apparent plan as to how that is going to happen.

According to Chris, land expropriation without compensation is a concern, although it’s more in the background. “In some of cases, it’s holding back investment - we just need clarity. We need to know exactly what’s going to happen. We know what the commitment has been thus far, but it needs to be on paper and it needs to be passed.”

Chris Holdsworth
"The issue is nominal growth in South Africa, which is currently 4.1% and that’s the lowest number we’ve seen since back in the 60s. The problem with that is what’s in the budget is 7%."

Chris Holdsworth, Investec investment strategist

Globally, Chris observed that two major themes playing out at the moment. The one links with inflation. “If you look at major countries, the US, Europe and some others too, you’ll find that inflation is consistently surprising on the downside and it has been for some time. So the pressure is off their central banks to hike. Inadvertently that means the pressure is off our central bank to hike. So globally, no real sign of inflation. It reduces some of the pressure on SA.” 
 
The other major theme is the tariff predicament. “It raises uncertainty for an emerging market in general and typically when there is increased uncertainty we get punished. Maybe it’s unfair but we do get punished. The rand weakens.” He says that it looks like the major protagonists – the USA and China - are settling in for a long battle and at least six months of uncertainty is on the cards. 
75%
What the energy availability factor needs to be for SA to grow
4.1%
SA's nominal growth is at the lowest it's been since the 1960s

What South Africans are - and should be - thinking about

The most important thing on the minds of South African’s in terms of the expectation of this new cabinet?
 
Ferial says, “If we look at all the research during the election, a couple of things are really interesting. Land did not come up as a major imperative, neither did the independence of the Reserve Bank come up as a top desire among the hearts of ordinary South Africans. What did come out tops was jobs, an end to corruption, quality housing. Those were the things South Africans are worrying about and thinking of for their own pockets, for their own aspirations and their lives.”
 

Institutions in a democracy matter

 
Governor Kganyago reiterated that institutions in a democracy matter. And quality institutions matter even more. South Africa’s institutions had been systematically weakened and, in some instances, gutted. But, many institutions do stand their ground and commendably so.
 
“Our constitution created particular institutions and tasked them with particular responsibilities. We created the Sarb in terms of the Constitution and tasked it with protecting the value of the currency in the interest of balancing sustainable growth. That’s where the mandate is derived from. We have been created to protect the value of the currency in the interest of balance and sustainable growth, that’s what we do.”
 
He concluded by saying that, “South Africans should actually be standing up in defence of its institutions.”

Watch the full panel discussion from our Cape Town event

About the author

Karen Meyer

Karen Meyer

Digital content writer

Karen has degrees in BA Communications and Honours in Journalism. She's responsible for writing and editing all the communication for Investec Private Banking. She has extensive experience in corporate communication and has worked in marketing for some of the country’s biggest brands.

Receive Focus insights straight to your inbox

Sending...

Please complete all required fields before sending.

Thank you

We look forward to sharing out of the ordinary insights with you

Sorry there seems to be a technical issue

This article also forms part of the Business Class series. For more insights from Business Class, click on the image below: