Investors and lenders have a negative sentiment towards SA’s stance on Russia’s war against Ukraine, which has manifested in the sale of SA bonds and shares by foreign investors, Reserve Bank governor Lesetja Kganyago said Tuesday.
The result has been that government bond yields have risen and the rand exchange rate has depreciated.
The governor said the Reserve Bank is concerned that the market is already starting to behave as if secondary sanctions are going to be imposed, because of SA’s non-aligned stance on Russia. The rand has reached record lows and government bond yields have risen across all maturities.
Secondary sanctions are applied to those countries that transact with the country subject to primary sanctions, in this case Russia.
Kganyago cautioned, however, that everything could not be reduced to secondary sanctions as the cause of these developments, as there were other factors, such as the fiscus and tax collection, are too affecting the market.
“So, it is difficult to pinpoint the exact contribution of the secondary sanctions,” he said. The Bank has not included the imposition of secondary sanctions in its baseline assumptions, but it is worried about the behaviour of the market.
Trouble ahead if sanctions bite
“In our interactions with investors, SA’s political neutrality is misunderstood and increasingly questioned,” Kganyago said in a briefing to parliament’s finance committee on the Bank’s recently released Finance Stability Review.
SA’s non-aligned stance has been undermined by the close military and diplomatic relations it has maintained with Russia and the heightened conjecture that it will invite Russian president Vladimir Putin to the Brics summit to be held in SA in August, despite the warrant of arrest that has been issued against him by the International Criminal Court (ICC).
So concerned is government about the international acceptance of SA’s stance that president Cyril Ramaphosa has appointed four ministers as envoys to explain the country’s position to Group of Seven (G7) countries.
Kganyago said that if sanctions were introduced they would restrict SA’s ability to make payments in US dollars, cause a loss of correspondent banking relationships, damage relations with SA’s major trading partners and cause loss of preferential trade agreements and a sudden stop of capital flows.
‘Inflation is spreading’
Responding to a question by DA finance spokesperson Dion George on the view by some economists that raising the repo rate will not curb inflation, because it is driven by the depreciation of the rand and imports, Kganyago said inflation had spilt over from temporary factors such as fuel and electricity prices into other prices, creating second-round effects.
“Inflation is spreading from those factors we consider temporary, being food prices, electricity and so forth, to what we call core inflation. And once it starts to spread to core inflation it then affects the manner in which price setters think about prices. As a result of this, you have to act, because if you do not act people will adjust their inflation expectations to a higher level.”
This would lead to a wage price spiral, which sets in when the central bank fails to act decisively when there is an indication that inflation is starting to be broad based.
SA’s non-aligned stance has been undermined by the close military and diplomatic relations it has maintained with Russia.
“Inflation has spread beyond the headline. We have seen core inflation has reversed and second-round effects are kicking in and we are having to respond and deal with that. Failure to do that, the incomes of South Africans would continue to be eroded.”
Kganyago noted that economic growth forecasts would be 2.3% this year without load-shedding instead of the bank’s present forecast of 0.3%.
While deputy governor Kuben Naidoo said the bank believed a grid failure was an “extremely low probability”, it had made preparations for this eventuality.
Preparations included plans on how the governor would close the markets in an orderly fashion and in an equitable manner as well as making parts of the payment system and financial markets system more resilient. The Bank had contingency plans to increase the size of its diesel tanks, so it can run its part of the payment system for longer.
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