Lesetja Kganyago is seated in the lobby of the Westin Hotel on Cape Town’s foreshore, his black suit enlivened with a searingly bright orange tie and colourful fashion socks, which have become something of a personal trademark.
The 53-year-old Reserve Bank governor, who has just been awarded a second five-year term, brims with energy and confidence. For a central banker, Kganyago has an excitable personality. Throughout the interview with the FM, he speaks with emphatic hand gestures and bright flashes of humour.
Investors and bankers love meetings with the governor. "Central banking is full of colourful personalities, but he is one of the biggest," says Intellidex’s Peter Attard Montalto. "People always have to be on their guard, however. A slight misstep in logic, a little hint of a suggestion that policy should be much looser or more unorthodox, and he will narrow his eyes, pause for a moment, and then pounce!"
He is held in such high esteem globally that he is the first governor from Sub-Saharan Africa to chair the primary advisory body to the International Monetary Fund’s board of governors. And last year, Kganyago was chosen as the global Governor of the Year by the respected journal Central Banking, which precipitated a flood of invitations to speak on central bank independence, from Washington to Frankfurt.
It’s an issue much in vogue, with US President Donald Trump having launched a blizzard of attacks against US Fed chair Jay Powell in recent times: last week, Trump branded him naive, and dubbed his Fed colleagues "boneheads". Central banks around the world are under attack, and Kganyago is showing how to respond. "The world has noticed," says Kganyago, "that we have managed to stand our ground."
And stand his ground Kganyago most certainly has, in the face of a running battle with public protector Busisiwe Mkhwebane. In June 2017, Mkhwebane issued a bizarre ruling, ostensibly about Absa, in which she said the constitution should be amended, and the Bank’s mandate altered so that its "primary object" was to ensure the socio-economic wellbeing of citizens, and to achieve socioeconomic transformation.
The Bank took Mkhwebane to court, and won. It won another battle against the Gupta-owned company Oakbay, which enlisted politicians to lean on Kganyago to stop private banks from closing its accounts over suspicious transactions.
Throughout it all Kganyago received support from many quarters. This included the Banking Association SA, which lauded him for being "a beacon of strength and stability" when many institutions were crumbling under the weight of state capture.
Less dramatic but no less important is the battle he has waged against inflation.
He seems to be winning this one too. Speaking to the FM, he is fully engaged with the question as to whether inflation has shifted structurally lower as a result of the Bank having changed its focus from an implicit inflation target of 6% to a more explicit 4.5%.
SA’s inflation records have indeed been tumbling, he says. He points out that in the latter part of this decade, the Bank has been inside the 3%-6% inflation target band more than it has been out of it. And inflation expectations – which remained sticky at around 6% after the global financial crisis — have been falling for three consecutive years.
The consumer price index (CPI) has now been inside the band for 28 straight months, since April 2017, the second-longest period on record. It has also been between 4% and 5% for the past 20 months.
Old Mutual Wealth investment strategists Dave Mohr and Izak Odendaal say that SA is experiencing a fundamental shift lower in its inflation dynamics. They say private sector economists have overestimated inflation by a cumulative 2.6% over the past five years. And since one would expect forecasters to overshoot as much as they undershoot, "the extent of the miss is telling".
Says Kganyago: "If it’s indeed a sustainable disinflationary path, then it’s a welcome development." He still feels it’s too early to call but agrees that "the signs look good".
This drop in inflation is due to a number of factors, he says. First, the pass-through effects of exchange-rate depreciation into higher inflation have moderated across all emerging markets. This appears to be due to benign inflation in developed markets. So, the inflation imported to SA has been negligible.
Second, SA producers, especially retailers, have chosen to take a hit, and see their own margins squeezed, rather than pass on higher prices to embattled consumers, given the low growth in disposable incomes.
But Kganyago also believes inflation expectations moderated because the Bank has entrenched its credibility as an inflation fighter. In other words, because business and labour believe the Bank has inflation under control, they’ve moderated their own price and wage demands accordingly.
Mohr and Odendaal suggest another reason: inflation is trending lower because firms have become leaner and more efficient due to technological advances — not just a lack of consumer demand. So, in setting prices, business has become more flexible.
Kganyago agrees that if new technology has spurred greater efficiency, then not only could SA be witnessing a shift lower in inflation, it might also be a sustainable one.
If so, then inflation could continue to surprise on the downside and should remain around the midpoint of the target band (4.5%) – which is the Bank’s goal. This could even induce the Bank to cut the repo rate by another 25 basis points, to 6.25%, this year.
Citibank’s Gina Schoeman is among a handful of economists forecasting another rate cut this year. "If you’ve more or less achieved the 4.5% midpoint target and got far closer to the midpoint on inflation expectations, then it opens the door for a potential rate cut … if it helps GDP growth without stimulating inflation," she says.
It all depends on the inflation outlook, replies Kganyago: "We’re at a point where the policy stance is deemed to be accommodative — below, or at the neutral rate, and providing support to the economy — but is also consistent with inflation at 4.5%."
Still, at last count, the Bank’s forecast was for inflation to rise to 5.2% in 2020. And though inflation expectations have dropped by about one percentage point over the past year (to 4.8%, 5% and 5.2% for 2019, 2020 and 2021 respectively), this is still towards the upper end of the band.
At its July meeting, the monetary policy committee (MPC) said it "would like to see inflation remain close to the midpoint of the inflation target range on a more sustained basis, with inflation expectations also anchored around these levels".
Clearly, the MPC isn’t convinced that the recent gains are sustainable. But while nobody, least of all Kganyago, is claiming the Bank has tamed inflation, it has certainly subdued it to a whimper — at least for now.
Strangely, this notable decline in inflation has gone largely unappreciated by South Africans. Instead, the Bank stands accused of not doing enough to support growth.
This criticism is implicit in Mkhwebane’s ill-fated attempt to alter the Bank’s mandate, and it’s also behind calls by the ANC to nationalise the Bank and to get it to target growth directly, not just price stability.
Some commentators have gone so far as to accuse Kganyago of being politically tone-deaf for reducing the target focus to the midpoint, just as President Cyril Ramaphosa was straining to reignite the economy.
The perennial question is whether it wouldn’t be better for SA, in the current low-growth environment, to target inflation of, say, 5% or 6% instead of 4.5% and allow interest rates to fall a little lower?
"No!" says Kganyago emphatically, "interest rates will be higher!"
In fact, he argues that the Bank has made Ramaphosa’s life easier by cutting the focus to a midpoint target. Not that making a president’s life any easier is the Bank’s purpose, he is quick to add: "It’s to execute our mandate without fear, favour or prejudice."
The story behind the Bank’s decision to steer inflation from the top end of the target band towards the 4.5% midpoint is a fascinating one. Kganyago starts by pointing out that every country that introduced inflation targeting when SA did (around the year 2000) has since revised their targets lower. SA now has by far the widest target range among its peer countries and, at 4.5%, its target is also higher than anyone’s, bar Brazil.
Of course, the higher a country’s inflation rate is relative to the countries it trades with, the less competitive it is.
Four years ago, the Bank took a critical look at its conduct, and realised that by seeming to tolerate inflation of 6% in the years after the global financial crisis, it had reinforced the view that the target was 6%. So inflation and inflation expectations had drifted to the top of the target range.
As a result, inflation in SA was higher than in about three-quarters of countries at that time. And, even more alarming, indexation had set in — prices and wages across the economy were locked in to grow at 6%.
This left SA in a trap, Kganyago says.
Nominal interest rates had to be high because inflation expectations were anchored at around 6%. But having relatively high interest rates meant there was always pressure from society to cut. And meanwhile, the indexation bias meant inflation never fell much and so, in turn, interest rates stayed structurally high.
"The paradox is that we have often been accused of being hawkish and keeping interest rates too high, when in reality we have often tolerated as much inflation as we can, ignoring the bottom half of our target range," he said in a recent speech. "This is the main reason why our interest rates haven’t fallen further."
The Bank realised it could better achieve permanently lower interest rates if it was clearer about where exactly it wanted inflation to be: at 4.5%.
It began studying "sacrifice ratios" to estimate how much growth would have to be sacrificed to lower inflation to this extent. The broad conclusion was that it would have to lift the repo rate to 8% or higher to get inflation down to 4.5%, which would shave about 1%-1.5% off GDP.
However, while the Bank was studying the problem, inflation began to slow of its own accord, partly due to a firmer rand. The Bank’s communication of its new 4.5% focus also probably played a role in moderating price and wage demands.
The upshot was that by the middle of 2017, inflation had fallen to around the middle of the target range — without the Bank having to adopt a tight policy stance.
"We started with the repo rate at 7%, and we never had to go above that," says Kganyago. "Put simply, we got a good opportunity to get inflation lower, and we used it."
The lesson is that the higher the inflation rate, the higher the interest rate a country must have. Conversely, if you want low interest rates, you must have lower inflation.
Kganyago considers it "a key macroeconomic accomplishment" that the Bank, by emphasising a target of 4.5%, has positioned SA to enjoy permanently lower inflation.
The Bank’s view has always been that keeping inflation low and stable is the best contribution it can make to SA’s prosperity. After all, it is not so much the rich that are advantaged by controlling inflation as the poor, since inflation hits the poor and those on fixed incomes, like pensioners, disproportionately hard.
The Bank’s conduct has also improved policy certainty at a time when it has been sorely needed, says University of the Free State economics professor Philippe Burger.
The credit rating agencies agree.
Throughout the state capture years, the conduct of monetary policy has been viewed by all the ratings agencies as a steadfast pillar of institutional strength — one of the few remaining elements still strongly supporting the country’s credit ratings.
"SA is lucky to have a governor as pragmatic, resilient, yet empathetic as Kganyago," says Schoeman. "Pragmatic, because his first term has illustrated how it’s possible to achieve lower inflation — a powerful enabler of growth — by sticking to the mandate. Resilient, because the governor has successfully guarded the Bank’s independence and credibility from many political intrusions. And empathetic, because the governor continues to remind us all that savers are not sufficiently compensated in SA."
During a group dinner a few years ago, Schoeman asked Kganyago what the Bank would do if inflation rose out of the target to, say, 8%. "His reply, with that knowing smile of his, was: ‘We’ll never allow inflation to get to 8% again’," recalls Schoeman. "He truly understands that inflation is the most toxic thing to this economy, no matter what income band you’re in."
And yet, the Bank has still failed to convince the public that it can’t do more to save the country from slow growth.
Not that it hasn’t tried. Every recent MPC statement includes a paragraph saying that SA’s economic challenges "are primarily structural and cannot be resolved by monetary policy alone". And the MPC has also reiterated that structural reforms which raise potential growth and lower the cost structure of the economy "remain urgent".
So why do people fail to understand that the Bank can’t affect the kinds of structural reforms needed to raise GDP growth – like faster internet, better schooling or reliable public transport? Why, instead, do people fantasise that somehow changing the ownership or mandate of the Bank will solve SA’s economic problems?
Kganyago thinks there are several reasons. The first is that in the aftermath of the global financial crisis, other parts of the state responsible for policies that drive growth didn’t come to the party — either globally or in SA. This led to central banks carrying a disproportionate amount of the burden.
The second reason, he says, is that from about 2010, the public discourse on the economy deteriorated to the point where no amount of evidence would sway people from their positions — including on contentious issues like "nationalising" the Bank.
"The tragedy of SA’s public policy discourse is that people take a position, but say ‘Don’t confuse me with your facts’," he says.
Kganyago cites the opposition to finance minister Tito Mboweni’s recent growth strategy by those who claim not to have been properly consulted, as an example of this. This was the main cry of Cosatu and the SACP, which argued that it was released "suddenly" and without "consultation". Mboweni’s reply: "People must get used to open consultation."
Kganyago says the past few years have been characterised by a rise in populism — not just in SA but globally. "The rise of populism and the burden on central banks to do more is not confined to SA," he says.
"The European Central Bank has been to the European Court of Justice to defend itself four times. In Italy, the government is trying to grab the central bank’s gold reserves. In Turkey, the government doesn’t stop telling the central bank what to do. So, I am fortunate our president has come out in our support, and we’re in a better space than many of our colleagues.
"The problem with populists," he says, "is that they don’t have to justify anything. They just peddle hopes without worrying about the consequences. It bothers me."
In fact, the Bank has spent more than a year researching the scourge of populism. Last year, Kganyago devoted an entire speech to the topic at the Association of Black Securities & Investment Professionals conference in Johannesburg.
His conclusion? There is abundant evidence that a populist economic strategy leaves people worse off than before. But despite this, the same ideas show up time and again, as if no-one ever learns.
Populism "pretends there are easy solutions, even where there are none ... [and] often the easy solutions have unintended effects [which] populists ignore or are unaware of. It is these unintended effects that usually end up hurting the people those easy solutions were meant to help."
In SA, he argued, there exists "a strong temptation" to adopt populist policies like allowing more inflation, maximising borrowing and taking greater economic risks in the hope that this will create growth and jobs. These policies should be resisted for two reasons, he said. The first is that "macro-economic stability is like oxygen. You don’t miss it until you haven’t got it, and then it’s all you can think about".
If you think inflation doesn’t matter, he said, go ask the Zimbabweans or Venezuelans who fled their collapsing countries. Kganyago believes that if Venezuela had embraced inflation targeting and central bank independence 20 years ago, it would now have low and stable inflation — not hyperinflation. And it would be richer for it, even though the central bank would have had to raise rates, making itself unpopular.
"It is better to have unpopular central bankers from time to time than hyperinflation and expanding poverty," he said.
The second reason to resist populism, he said, is that countries like SA with acute inequality, poverty and unemployment, shouldn’t put their fragile societies through the "brutal austerity" that would inevitably follow. "What we have had in SA over the past few years isn’t anything like [real austerity]," he said. "We have interest rates close to record lows (the repo rate is 6.5%) and government spending has been increasing every year, faster than inflation. Real austerity is having interest rates at 65%, as in Argentina at present, and cutting pensions and grants and firing government employees.
"We should avoid reckless economic policies unless we want to risk putting our society through that pain and stress."
That said, Kganyago wouldn’t ignore populists completely. While they might be bad at economics, they’re "uncannily good" at detecting where society is hurting the most.
"They’re a reminder to better-informed, more responsible people that things have to change," Kganyago said. "We cannot just say the populist path will end in disaster. It will. But we still have to point out another path. You cannot just be against populism — you need to be for something too. We need to talk about how we are going to get back to real and sustainable growth in SA."
But this is where Kganyago draws the line. In particular, he won’t stray into the realm of fiscal policy or other departments’ briefs by suggesting what structural reforms are needed to get growth going.
He is happy to talk about two other policy flashpoints, though: exchange controls and prescribed assets. (Under a regime of "prescribed assets", the government would stipulate that part of your pension must be invested in, say, state-owned companies.)
SA can do without both of them, says Kganyago. This will be music to investors’ ears, at a time when South Africans are becoming increasingly jittery about the state curbing their financial choices, and are looking at ways to send their wealth offshore.
I’m a technocrat. My political skills are third-rate. Even in the struggle I would end up doing the accounts. I am a technocrat. Just let me be who I am
— Lesetja Kganyago
"As a country with a shortage of savings, we want to attract foreign savings, [so] we shouldn’t have foreign exchange controls," he says. "If as a foreign investor you see the government doesn’t trust the locals, you worry: will the government also one day stop me from withdrawing capital?"
The SA government’s stated policy has always been to liberalise foreign exchange controls to the point where doing away with them would be a nonevent. But the progress to eliminate the last vestiges of control has stalled in recent years.
On prescribed assets, mooted by the ANC in its May election manifesto, Kganyago leaves one in no doubt that it would be a foolish idea.
"It could even accelerate the scourge of corruption again," he warns, by forcing funders to waive the requirements of ethical and impactful investing they would normally apply to any investment decision.
He points out that government debt of more than R1-trillion — including that of Eskom, the SA National Roads Agency, and the Industrial Development Corp, which funds industrialisation — is already largely held by domestic institutional investors.
And he points out that Basel 3, the global regulatory standard, already requires banks to hold high-quality liquid assets which includes government bonds. "So, what [more] do you want them to do?" he asks. "[If the goal is to increase funding for infrastructure], government must bring down its borrowing to lower interest rates to increase private investment in infrastructure."
Despite Kganyago’s stellar career, it hasn’t been without its challenges.
For example, around 2002, when he was a director at the National Treasury, his team costed the impact of providing antiretrovirals (ARVs) for people with Aids and found it would be more costly, in terms of lost economic growth, to deny treatment than to fund it. The research was done with donor funding but it wasn’t known to the rest of the government, including President Thabo Mbeki, who was a notorious Aids denialist.
When Kganyago was pushed to reveal the results during a parliamentary committee meeting, it caused "a frenzy" in the government. "It was a big challenge at the time," he says, "but I felt pride in 2004 when the government decided to roll out ARVs."
Kganyago is not just a gifted technocrat, he’s a crusader for central bank independence and low inflation
— What it means
In 2009, after he was appointed Treasury director-general, he heard that the Catholic Church had taken a militant position against e-tolls. "I’m a Catholic, so I decided to go and speak to the head of the church’s justice and peace committee on the economics of e-tolls. But it turned out he was my former parish priest, so I decided to hand the matter to my other colleagues."
Another challenge is not being able to find time for his family — his wife, Zibusiso (who works in gaming development at Tsogo Sun), and three children, aged 14, 16 and 20.
"They grow fast and it doesn’t matter if you try to find a balance. It doesn’t matter if you have a formal family holiday once a year or weekends away, the job entails a lot of travel and when I’m not travelling, I’m in the office late. So it puts a burden on my wife."
Despite these demands, Kganyago says: "I wouldn’t give this job up for anything."
He won’t confirm that he turned down Ramaphosa’s offer of the post of finance minister — "because conversations between governors and presidents should remain private" — but he does explain why he wouldn’t want the job, if offered.
"I’m a technocrat. My political skills are third-rate. Even in the struggle I would end up doing the accounts," he says. "I am a technocrat. Just let me be who I am."
It’s a plea that many central bankers are making, all over the world, right now.
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