SA had got itself “into a lot of trouble” even before the current economic crisis set in and is running out of time to make the policy choices needed to get it through, Reserve Bank governor Lesetja Kganyago said.
Kganyago said in a virtual public lecture to Wits University's School of Governance on Thursday that SA risked following Argentina’s path “where ideological conflicts and unstable macroeconomic policies produced a steady economic decline”.
He defended the Bank's conduct during the current crisis, saying its 250 basis points of cuts and other measures to inject liquidity and boost lending by commercial banks belied accusations that that it was conservative.
The Bank has consistently rejected calls for it to step up its bond-buying programme or buy debt directly at government auctions as a way to help the country manage the cost of funding a budget deficit that some economists say may jump to more than double the 6.8% presented in February. The debate around quantitative easing has intensified during the crisis.
In the speech, titled “The SA Reserve Bank, the coronavirus shock, and the age of magic money”, Kganyago said the country was struggling to learn the correct lessons from a decade of economic stagnation that means South Africans have been getting poorer since 2013.
“In the world, we are slipping backwards,” he said, noting that SA incomes as a proportion of those in the US had halved since 1960, to 13% from 26%. It had also under performed Brazil and instead risked following Argentina's path.
One of the 10 richest countries in the world prior to the Great Depression about a century ago Argentina is nowadays synonymous with instability in emerging markets. In May, it defaulted on some of its debt and is in the middle of trying to restructure about $65bn of debt.
Though the Bank ordinarily abstains from commenting on fiscal policy, there are “problems of fiscal sustainability in the mix,” which required the Bank “to act, and to communicate, with caution”, Kganyago said.
Even before the Covid-19 crisis, SA was running “crisis-level” deficits at over 6% of GDP, while the state’s debt levels were on a rising trajectory, Kganyago said.
His comments echoed those of finance minister Tito Mboweni who said the country risked a full-blown sovereign debt crisis in the next four years if it didn't cut spending and take into account of the fact that it wasn't as rich as it once thought it was. Mboweni has proposed that SA adopt a policy of zero-based budgeting, which would mean the country starts “with clearly articulating our priorities and allocating funds according to our revenue base”.
Kganyago said proponents of the Bank increasing bond buying, with some suggesting that it could purchases R10bn to R20bn per week, were talking about numbers that are “not modest.”
“These numbers imply that the SA Reserve Bank would be buying, more or less, all new debt for the foreseeable future,” he said, adding that it would crowd out pension fund and institutional investors.
SA would be sending a “dangerous signal” he said, pointing to the euro area sovereign debt crisis from a decade ago, which showed how damaging it can be for countries “to send mixed messages about their future monetary arrangements”. Borrowing costs in eurozone countries such as Greece and Portugal surged a decade as investors worried that unsustainable debt loads would see them forced out of the common currency bloc.
“In SA, the risk is that the domestic currency will no longer be issued by a credible, inflation-targeting central bank, but by one that is fully financing the public sector instead,” he said.
SA needed to “define a new approach for the future”, he said stressing the need to chose “pragmatic” economic reforms to enhance growth and create jobs.
With Linda Ensor
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