Q: You’ve said that you are an advocate of open global trade. The world is not headed in that direction now. Is that a source of frustration?

A: Openness of trade is not the status quo, the world is still striving towards more open trade. Let’s make things clear: trade is good for the global economy. Evidence shows that since the process of opening up trade started, the world has taken more people out of poverty; the incomes of people in countries that have embraced trade have risen; and the benefits that we have seen over the past two decades of low global inflation have been the result of trade. So the current trade tensions cannot be good for the global economy. OECD data shows that in 2017 global trade grew by 10% and GDP growth accelerated. The OECD is projecting that growth for 2018 will slow down to about 5%.


Q: Emerging market economies, including South Africa, have been very volatile in the past couple of months, including losses on the rand. Are you concerned by the inflationary outlook?

A: We recently had our policy committee meeting. We identified risks with respect to the exchange rate, we expressed concerns about risks with respect to the oil price. We had indicated that the South African economy is facing an environment where you could have inflation rise in an environment where growth is still weak. We still expect in our forecasts that inflation will remain within our target range of 3% to 6%. We would have preferred the inflation outcome to come closer to 4.5%, which is the midpoint. We believe this is one of the ways in which South Africa could rebuild its buffers, which means that when there is a global adjustment we have room to play with in the inflation target range.

Q: South Africa is currently in recession. What role do you see for the central bank in kickstarting growth?

A: The government has been providing a fairly accommodative monetary policy; we still believe that the monetary policy as it stands now is still accommodative. I think that the growth problems that South Africa is having at the moment are not physical problems, they are structural problems that need to be dealt with through structural reforms. [These] are not within the realm of the central bank, they are within the realm of the broader government. 

The presidency made an announcement about a recovery package that included a number of short-term structural changes including the release of [a high-speed broadband internet] spectrum and a reform of the visa regime. We have beautiful tourism assets, and in spite of stringent visa regulations tourists continue to come to South Africa. We said: why can’t we make it even easier for tourists to come? Tourism itself is not only an important [source] of foreign exchange, it is also a very important employer for low-skilled individuals. We now have to overcome that old South African disease which is called 'the execution deficit'. If we actually implement these [measures], we think we will see the economy starting to pick up again.

Q: The US Federal Reserve is signalling that it will continue to hike interest rates, prompting investors to retreat from emerging markets. Do you think the Fed is conscientious enough about its effect on emerging markets?

A: I’ve got no doubt that it has that conscientiousness, but let’s understand something: [it] is the Federal Reserve Bank of the US. If it has concerns about developments that could potentially undermine the prospects of the US economy, it has to act accordingly. 

I think it’s important that we take a step back to 2013, when the Fed announced that it might be withdrawing its accommodative monetary stance through quantitative easing at the time. There was this shocked response from other markets because it didn’t look like the Fed had prepared the market for it. The communication from the Fed since then has been very clear and measured. 

For us sitting in South Africa, we have to look and see where we were in 2013. We had inflation either outside the target or at the upper end of the target range. We were running twin deficits, [which] combined were more than 10% of GDP. Where are we now? South Africa is less vulnerable than it was in 2013. The budget deficit is between 3% and 4%, so has been brought down, the current account deficit sits at about 3.1% or 3.2%. Inflation is within the target range. Importantly, South Africa is running a positive net international investment position of close to 4% or 5% of GDP.

Q: Nevertheless, South Africa is clearly feeling the effects of global headwinds. 

A: Developments in the international capital markets will affect us, and the manner in which we would expect that they would affect us is already playing out. [These] were a repricing of global financial assets, a reversal of capital flows from emerging markets and, with that, a realignment of exchange rates globally. That was how we thought about it in 2013. We missed two things: one was the rise of trade tensions and protectionism, the other was the increase in energy prices.

Curriculum vitae

Lesetja Kganyago

2018: Governor, South African Reserve Bank

Previously: Director-general, National Treasury of South Africa