SA’s investment environment will continue to improve because its monetary and fiscal authorities have moved firmly back into a trajectory focused on sustainable fiscal policy, and a monetary policy that is capable and willing to reduce inflation, SA Reserve Bank governor Lesetja Kganyago says.
Kganyago told delegates at a market close event in New York on Monday that the tightening of monetary conditions — matched by fiscal actions to achieve a primary surplus and reduce the rate of growth in public debt — are critical to derisk the economy.
He added that moving to a more neutral macroeconomic policy stance will improve the risk-reward ratio for private sector investors, both foreign and domestic, and will lead to stronger domestic investment rates over time.
“As the global and domestic economy become less risky in the coming months and years, the build-up of these financial positions will occur again. Foreign investors will re-enter South African markets — and other emerging markets — due to better real growth differentials and higher yields, while residents will rebuild diversified portfolios that include foreign assets,” Kganyago said.
“It is useful to remind ourselves that SA’s financial markets are deep and robust, and well integrated with world markets.”
Kganyago is in New York ahead of his attendance at the 2022 World Bank and IMF annual meetings this week where a new memorandum of understanding (MOU) between the JSE and the New York Stock Exchange (NYSE) was signed.
The MOU is to foster closer ties between the two markets, and is aimed at increasing economic partnerships and trade opportunities.
SA shares significant economic interests with the US and is its largest African trading partner. The Bank said despite rapid growth in Asian economies, the US remains one of SA’s top five main trading partners.
In 2021, US exports to SA totalled $5.5bn — a 25.8% increase from 2020, while US imports from SA totalled $15.7bn — a 38.5% increase. There are about 600 US businesses operating in SA and many use SA as their regional headquarters, and a springboard for greater opportunities on the African continent.
“It is encouraging that the JSE and NYSE will continue to explore new areas of co-operation and collaboration in strengthening their value propositions for their respective markets,” Kganyago said.
He told delegates that despite the SA economy being hit by multiple and often overlapping shocks that have led to a weaker local exchange rate, high inflation and slow growth, SA assets remain attractive.
“In South Africa we have a free-floating exchange rate, and we are very tolerant of exchange rate fluctuations. This is because we have low levels of foreign exchange debt, and we have inflation expectations that do not react strongly to exchange rate movements.”
“This means the currency is free to adjust to global conditions, and when it depreciates, as it has done recently, it makes South African assets very attractive in foreign currency terms,” Kganyago said. “You could say this is a strategy of attracting the smart money — when the currency moves a lot of the smartest people buy, and this helps reverse the outflows.”
He said the weak exchange rate, as well as the steep yield curve, which means long-term debt is being held, in volumes, by private investors, and it is priced accordingly, are reasons why local assets remain attractive.
The governor also reiterated his stance on adjustments to the country’s inflation target, which he said will deliver better economic results.
“I hold firmly that a better inflation target is like the example of a $100bn lying on the sidewalk, waiting for us to believe our eyes and pick it up.
“These steps are not enough to achieve the stronger economic growth rates the country needs, but they are critical steps in moving forward,” Kganyago said.
He said the better inflation target will complement the reform agenda set by the government, which if implemented would make SA’s investment environment more attractive to domestic and foreign capital.
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