President Cyril Ramaphosa is expected within the next week or two to appoint a new deputy governor for the Reserve Bank to replace Kuben Naidoo, who departed in December.
At the same time, the president is expected to reappoint governor Lesetja Kganyago for a further term of office, along with his other two deputies — Fundi Tshazibana and Rashad Cassim — all of whose five-year terms are due to end later in 2024.
Finance minister Enoch Godongwana was persuaded to confirm this on the sidelines after a media briefing in Cape Town on Wednesday ahead of his budget speech. An announcement on the Bank’s leadership is more urgent than ever after a budget in which Godongwana announced plans to draw down half of the R506bn of paper profits on SA’s gold and foreign exchange reserves.
This is because it is the Reserve Bank that has to implement the complex and risky series of transactions involved in monetising those paper profits without fuelling inflation or causing financial instability. As things stand we have no certainty about who will be in charge by the end of 2024.
A single early announcement from the president on all four governorships would head off any uncertainty and underpin the Bank’s credibility at a crucial time. But the credibility of our monetary policymakers will have to be matched by fiscal policy credibility if the Treasury is to pull off the Gold & Foreign Exchange Contingency Reserve Account (GFECRA) deal in a way that entrenches sound public finances, along with a sound central bank.
The Treasury’s promise to devise and legislate a new fiscal anchor for SA is therefore an important link. Without a rule or anchor to prevent the government from running up the public debt burden again, the markets will inevitably fear that the government will simply squander the GFECRA’s benefits.
Those benefits are formidable. The net R150bn the Treasury plans to draw over three years will cut its annual borrowing requirement — now running at more than R550bn — as well as reduce its high cost of debt.
The GFECRA “settlement”, and the legislation that goes with it, will also permanently settle the question of how the profits or losses on SA’s foreign exchange reserves will be managed into the future. SA’s treatment has been an anomaly globally. Going way back, the Reserve Bank Act stipulated that the revaluation profits or losses on the gold and foreign exchange reserves were for the account of the Treasury, even though the reserves themselves sat on the Reserve Bank’s balance sheet.
As Kganyago recounted in a history lesson to journalists on Wednesday, the Treasury at one stage had to hand over large sums to the Bank to compensate it for GFECRA losses when the rand was appreciating.
Elsewhere, the revaluation profits (or losses) would go to the central bank itself, which would pay over some of this to the Treasury as dividends. Had SA had a similar dispensation to other countries, the Bank might have been handing over R20bn-R30bn a year to the Treasury as the rand depreciated and the value of the reserves appreciated. Instead, enormous profits have accumulated, which neither the Bank nor the Treasury can touch without legislation to enable a transfer.
For the public purse, the benefit of a windfall R150bn can be seen in a debt ratio that is projected to stabilise in two years’ time, and at a lower level than Treasury earlier expected. Debt costs will be lower too, not only because the government will be borrowing less but also because the cost of the GFECRA money is lower than the 12% at which the government is borrowing long-term money on the market.
But as Wednesday made clear, that GFECRA benefit does come at a cost, which is why the Treasury will transfer R100bn back to the Bank to cover that cost and keep the Bank solvent — and eventually will have to inject more. The reason is that the Bank will realise the profits by creating reserves at the commercial banks on which it has to pay interest, in perpetuity, at the current 8.25% repo rate (or whatever the repo is by the time the GFECRA transfer happens). The Treasury will then be able to draw the money from on its accounts at the commercial banks.
The big question is what it does with the money. The risk is that in three years’ time it could have squandered a chunk of the GFECRA profits but will be paying for them forever. The more immediate risk is that unless the process of monetising and transferring the GFECRA profits is deftly handled, it could cause all sorts of issues for the market, and for monetary policy. Then there are the far bigger “moral hazard” risks. Tapping the GFECRA windfall could take the pressure off to restrain spending and run more sustainable public finances.
A fiscal anchor could help address that, and buttress the credibility of the Treasury by cementing and legislating a sustainable level of public debt. If the government were willing to back a restrictive anchor it would certainly help rebuild some of the credibility the Treasury has lost with a series of budgets that endlessly promise fiscal consolidation and debt stabilisation and equally endlessly fail to deliver it.
But there is still the danger that once the government has tapped the Reserve Bank’s balance sheet once, a future government might be tempted to tap it again to finance spending SA cannot afford — and a future Treasury might not be so responsible. That leaves the Bank as the last bastion to prevent a government bent on printing money and going the profligate, inflationary spiralling way of Argentina or Turkey.
SA’s constitution safeguards the Bank’s price stability mandate, and the Bank is mandated by legislation to safeguard financial stability. But those safeguards are only as good as the people tasked with implementing them — which is why it matters so much who leads the Bank.
Of course, it matters who leads the Treasury too. This budget was the first to be presented by Duncan Pieterse in his new role as Treasury director-general. Pieterse was formerly in charge of government borrowing as head of the Treasury’s asset and liability management division. It was probably no coincidence that Wednesday’s budget had such clear messaging on why it was such as priority to cut debt and debt service costs, which as Pieterse put it in the Budget Review, “are choking the economy and the public finances”.
The GFECRA will help, for now. But investors are charging the government a steep premium to lend to it because they lack confidence that the government will be in a position to repay them a decade or two or three from now. The Treasury and the Bank are sadly limited in their ability to get the government to unlock higher economic growth. But as Pieterse emphasised, lowering the cost of debt would lower borrowing costs across the economy and stimulate investment and growth.
Their credibility as institutions is key to achieving that. And institutions depend on people.
• Joffe is editor at large.
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