The headline is inspired by the statement of the monetary policy committee issued by Lesetja Kganyago, Governor of the South African Reserve Bank issued on January 26, 2023.
The Governor states: “While the South African economy grew by a relatively strong 1.6% in the third quarter of 2022, the expansion was not broad-based. We forecast no growth in the fourth quarter.”
The reality was light years from zero as South African gross domestic product (GDP) declined by 1.3% in the fourth quarter (October‒December). At the time that the Governor issued his statement it was already three weeks past the end of the fourth quarter to which he refers. How is it possible that he is so clueless at what has transpired?
Even the so-called consensus view was that there would be negative growth, i.e. contraction of the economy. One does not expect of him to get a bull’s eye, but the enormous misjudgement should have all (the whole world) that depend on the Reserve Bank to direct the ship a little worried. There is a massive difference from zero to -1.3%. ChatGPT could probably have given a better estimate and at a substantially lower cost, and a more “informed decision” with substantially less devastating consequences.
The Governor further stated that “for 2023, and because of extensive load shedding and other logistical constraints, the Bank now forecasts GDP growth of only 0.3%. Given the scale of load shedding, the Bank estimates that it deducts as much as 2 percentage points from growth in 2023, compared to the previous estimate of 0.6 percentage points.” This equates to R178 billion, a very, very high price to pay for maladministration.
My concern with this misjudgement of the economy at the point when the last interest rate adjustment was made comes down to the tragic consequence of the huge miscalculation. If the last interest rate increase was considered warranted because the economy would not shrink, what now?
All the consumers that have existing bonds and car and other debt had to pay the banks more interest for nothing received. The banks gave those consumers nothing in return, the Reserve Bank misjudged the state of the economy by a country mile, and nobody calls the financial system to order. A redistribution of wealth from individuals to Banks.
Not to oversimplify matters, the mandate for the Reserve Bank is to implement interest rate policies to curb inflation while keeping an eye on employment, read economic growth. If you get the latter wrong, you will implement the wrong policy.
South Africa prides itself on its sophisticated and robust financial system. Yet we have just been grey listed, just been downgraded even further. Are we ever proactive or must we be instructed by the Western world what rules and regulations we should have implemented. There is nothing wrong with world best practice, but once you become a follower you will stay behind the curve.
In modern economies, the central bank is usually responsible for the formulation of monetary policy and the regulation of member banks. A central bank is a public institution that manages the currency of a country or group of countries and controls the money supply – literally, the amount of money in circulation.
The main objective of many central banks is price stability. In some countries, central banks are also required by law to act in support of full employment. In South Africa, the Reserve Bank lacks a clear mandate /obligation and conviction to address full employment. They are not improving, or have any measures to assist employment. For this reason, the above miscalculations is just not acceptable.
One of the main tools of any central bank is setting interest rates – the “cost of money” – as part of its monetary policy. In the US subsequent to the invasion of Russia of the Ukraine, domestic inflation rose to unprecedented levels.
Fortunately, they started at a point of almost full employment. However the governor of the Federal Reserve was very aggressive in raising interest rates to tame inflation, but there were consequences.
US authorities acted in the last two weeks to contain the damage from the collapse of Silicon Valley Bank (SVB). The second largest bank insolvency in US history. They focused on business customers, start-ups throughout the tech sector in Silicon Valley. So, in effect, the government has gotten into the banking business. It is guaranteeing all deposits. The Bank boasted of providing services to almost half the venture capital-backed tech and life sciences businesses in the US. At the end of 2022, it held $157 billion of deposits across just 37 000 accounts.
SVB committed the cardinal banking sin: borrowing short from its tech firm depositors and lending long by investing in long-dated “available-for-sale” Government bonds, and “hold-to-maturity” illiquid corporate bonds. As rates rose, the bank “discovered” the rise in interest rates had hammered the value of its liquid government bond portfolio. And if it sold its hold-to-maturity illiquid bonds, it would trigger such a loss as to make the bank immediately insolvent.
Are these letters of SVB bank in the US and VBS in SA, and now the latest US banking failure – Signature Bank – the alphabet jinxed?
All I know is that our governor must tread carefully with interest rate increases. Any raise in interest rates affects much more existing debt as compared with their intended target of new loans which they wish to curb. Change the mindset and seek a more effective way to deal with inflation. The current approach is not working, especially for the have nots. See Transactional Capital’s battle with taxi finance. Almost half of the listed company’s value was wiped off the JSE.
Kruger is an independent analyst
The views expressed do not necessarily reflect the views of IOL or Independent Media.
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