News of Reserve Bank deputy governor Kuben Naidoo’s resignation has come as a reminder that it is a delicate time for the Bank.
Its succession is an issue, with the contracts of all of its four governors due to end or be renewed over the coming year. This is unfolding at a delicate time in a country heading into elections and a world heading into a higher-for-longer interest rate cycle. The strength and credibility of the Bank’s governors matters for interest rates and inflation. It matters as much, if not more, for SA’s banks and financial markets. And even if the credibility of the institution seems safe in the shorter term, policymakers should look out too for the risks in the longer term.
Almost four months after Naidoo informed the president he wanted to step down to do something different, the president and Bank still haven’t set a date for his departure. It is the kind of messy succession that the Bank wouldn’t want to see at any of the commercial banks it supervises, and it can only add to investors’ lack of confidence. The Bank and the Treasury are two major institutional strengths that keep SA on investors’ radar screens despite its many challenges. But strong leadership is needed to protect those institutions.
Uncertainty
And we are headed into a period of uncertainty, brought forward in part by Naidoo’s request to leave before his term ended in March 2025. The terms of the other two deputy governors, Fundi Tshazibana and Rashad Cassim, come to an end in August and that of governor Lesetja Kganyago in November. There is no limit on the number of terms they can serve so all three could be renewed for up to five years, if they wish to stay. But the president makes the appointments. And the legislation says he does so “AFTER” consultation with the Bank’s board, not “IN” consultation. In other words, he needs to discuss succession with the board but he isn’t obliged to listen. Ramaphosa surely knows how crucial stability and credibility at the Bank are and is widely expected to make sound appointments. But even assuming he is still president after next year’s election, who knows what pressures and trade-offs he might face in a possible post election coalition government?
All of which makes it important for these decisions to be made sooner rather than later. At least SA’s president can’t fire the central bank governor — unlike in Turkey, where the president went through five governors in two years as he drove the country into an inflation and currency crisis. But he has the power to hire — and with all the governor posts in play, could in theory change the face of the institution quite quickly. Nobody is assuming that will happen now, but clarity is needed.
Meanwhile, markets are assessing interest rate probabilities given that the dynamics of the monetary policy committee could be different in coming months. MPC members don’t split crudely into hawks and doves in the way many believe, and Naidoo is as likely to have been hawkish as dovish lately, with an eye especially to global developments. But with the MPC reduced to four members, the governor would have the casting vote if the members split. He is widely seen as a hawk. But then central bankers globally are tending hawkish in a world facing longer term climate change and supply chain shifts, one in which new risks seem to keep materialising. Interest rates may yet go higher still. Certainly central bankers are struggling to time the turn in the cycle, and emerging markets are taking pain.
Astute leadership
SA will need astute central bank leadership in the next two to three years and beyond to implement and communicate monetary policy — especially if pressure on the politicians to change the Bank’s price stability mandate emerges yet again. And while the price stability mandate, and the Bank’s independence, are enshrined in the constitution, strong and independent minded people are needed to safeguard that.
That’s even more so when it comes to safeguarding the integrity and soundness of SA’s banking system, and its financial system more broadly. The Bank’s Prudential Authority, which was set up under Naidoo’s leadership, is responsible for the soundness of banks, insurers and other financial institutions.
The Guptas would have got their banking licence, via Habib Bank, if the Bank hadn’t said no. The dodgy dealings and corrupt loans at VBS Mutual Bank were stopped only when the Bank finally put VBS Mutual Bank into curatorship. We don’t know what other dodgy dealing and money laundering might quietly have been halted by intervention behind the scenes by the Bank’s banking and insurance regulators and its financial surveillance (exchange control) regulators. We do know from the example of the SA Revenue Service how easy it was to capture a good institution by installing a bad leader.
We know too from the lessons of bank crises here and abroad, as well as from the financial crisis of the early Covid days, how much good regulators matter to ensure the country’s deposits and savings are safe and its payments system works seamlessly.
Biggest risk
But the biggest risk SA could face, if not now then in future, is from the rising pressure to monetise the public debt that could mount as government’s finances deteriorate and its debt spirals in coming years. The current debate over whether to raid the unrealised profits on the gold and foreign exchange reserve account to fund part of government’s borrowing requirement is an early, albeit legitimate example of this. More pressure on the Bank to intervene in financial markets to buy government bonds or deploy other methods to monetise the debt could come later. Independent minded central bankers would be more important than ever under such scenarios.
But perhaps the market is already pricing in the prospect that SA cannot rely on the central bank to stand up to pressure in the long term, even if it can in the short to medium term.
As the Bank showed in its recent Monetary Policy Review, SA has a yield curve which is much steeper than other emerging markets, with one to two year government bonds trading at yields of less than 9% while 20 to 30 year bonds trade at well over 12%. Investors are demanding very steep returns to lend to government for 20 years, implying they see the public finances continuing to slide and simply don’t trust that the Bank will be able to hold the line on inflation and interest rates and ensure their money is safe a decade or two hence. It’s a sobering picture, and every shock lately — from Phala Phala to Lady R — has made it more so. All of which should remind the president of the damage to be caused by delay and indecision over appointments at a crucial institution.
• Joffe is editor-at-large
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