As financial analysts express concern about South Africa’s high interest rates and weakening rand, Lesetja Kganyago, the Governor of the South African Reserve Bank (Sarb), says his focus – as his mandate dictates – lies elsewhere: inflation.
The rand fell to a four-month low on 5 October. At 15:05 GMT, the local currency traded at 19.5700 against the dollar.
Danny Greeff, co-head of Africa at ETM Analytics, told Reuters that, given South Africa’s heightened fiscal risks and deteriorating economic fundamentals, the rand lacked resilience against the broader ebb and flow of market sentiment.
That same day, senior news anchor Alishia Seckam asked the Sarb governor whether he was worried. Kganyago was headlining the latest episode of Think Big – a webinar series that engaged prominent “thought leaders” on some of the country’s most pressing issues.
“I worry about inflation. The exchange rate is not one of the variables the central bank controls,” Kganyago said.
Risks to inflation
Annual consumer inflation slumped to 4.7% in July from 5.4% in June. In 2022, the inflation rate stood at 6.87%. The Sarb’s target range is 3% to 6%.
Kganyago said that even as inflation comes down, there are risks to the inflation outlook.
“Among the risks we have identified have been the oil price, food prices, and the possibility of an El Niño effect. The exchange rate is one that we have also mentioned. So, we worry about the currency to the extent that it ends up feeding into inflation.”
Kganyago added that global financial conditions have tightened.
“Put simply, interest rates globally have gone up. And the indications are that interest rates globally are going to remain high for longer.”
He said that means there will be a realignment of exchange rates.
“And we have seen this, this week. The pound is at its weakest against the dollar since whenever … There is a realignment of exchange rates. The rand is no exception to that.”
Interest rates – up or down?
The Sarb’s Monetary Policy Committee kept the key repo rate steady at 8.25% at its September meeting. The prime interest rate is 11.75%.
At the beginning of the month, Businesstech reported a “Big turn for interest rates in South Africa”, with consultancy PwC saying that if positive economic conditions, such as lower inflation, persist, the country could start seeing rate cuts in 2024. However, the latest economic data from the US Federal Reserve has cast doubt on this forecast.
The Fed chose not to raise interest rates at its September meeting and left the Federal funds policy rate at 5.25% to 5.50%, but the median expected Fed funds rate for the end of 2024 and 2025 had risen by 50 basis points to 5.1% and 3.9%, respectively. A small majority of the committee indicated they expected another rate hike before the end of this year.
According to Keith Wade, chief economist and strategist at Schroders, given the unchanged inflation projections, this implies higher real interest rates.
“It also means there would only be scope for modest rate cuts in 2024,” said Wade.
This added to speculation that South Africa might see a possible interest rate hike later this year. Kganyago said “one can’t say where things go”.
“What you should be watching is what happens to the inflation because the only thing that makes central banks increase interest rates is because inflation has gone up … The higher the inflation, the higher the interest rate. When inflation is low and consistently low, you will see lower interest rates.”
‘Naughty’ local governments
Kganyago said one way to lower inflation was to look at the inflation basket, to see what was rising and whether there was anything that could be done about it. He said one component that has been consistently rising faster than the inflation rate is administered prices.
“And you know who sets administered prices? Government, of course. That means that we can arrest inflation if the price that the government sets is consistent with the inflation, the inflation target.”
He said among these administered prices were water and electricity and “also something naughty local governments do”.
“They play around with your rates and taxes.”
Property rates are based on the market value of the property. Kganyago said although ratepayers could, for example, look at a 5% increase in rates and say, ‘Okay, I could manage that’, the increase becomes less affordable if a municipality suddenly raises the estimated value of your property.
“They go and they revalue your house and say that your house is now worth this much, and you end up paying more anyway … How could anyone justify revaluing my house by 10%, 20% when the inflation rate is 4.8%? … That is not what we see with the housing market. So, municipalities are actually making the situation difficult,” said Kganyago.
Key economic constraints
Kganyago said South Africa’s key economic constraints are structural.
“Post the pandemic, the world was opening up. Iron ore prices, coal prices shot up – the bulk commodities. South African mining houses were being profitable, but we just couldn’t get the iron ore there; we couldn’t get the coal there. There are problems in our national logistics system.”
The country’s electricity crisis is another hurdle.
“Without energy, you can’t fuel a modern economy, and so the electricity constraint is binding for us.”
But for Kganyago, perhaps the biggest impediment is South Africa’s poor education outcomes.
“The biggest wealth of a country, of a modern economy today … is that which is in the heads of its citizens, is the know-how, and that is where we should actually be focusing. Creating know-how because that is how countries grow. And that’s how countries compete.”
Kganyago said, despite all these constraints, South Africa is an investment value proposition with a vibrant democracy and institutions that are working, and it is home to world-class companies.
“These challenges are not insurmountable. Last week, one of these weekly publications ran a story of executives who said if there is something that can be done to save the country. And they had all sorts of ideas; solve this, solve that. I just liked one – stop talking and do things.”
