Members of the SA Reserve Bank’s monetary policy committee may well be relieved that their last meeting came before the release of SA’s disastrous unemployment report.
They may have faced a different set of questions about their priorities if they had raised interest rates at the back of a report that showed that close to 50% of the country’s adult population, inclusive of those who have stopped looking for work, were out of a job. The pace of Federal Reserve tapering, and whether inflation spikes are transitory or permanent would not have been top on anybody’s mind.
Governor Lesetja Kganyago would have probably given the same answer, pointing out that it’s not the job of monetary policy to do the heavy lifting when it comes to getting the economy growing and creating jobs. He has previously pointed out that no business-person wakes up in the morning thinking about how many jobs they are going to create. That is a byproduct of an enabling environment that encourages those who have capital to deploy it. That does sound rather theoretical and far removed from reality in the context of the problem at hand, and it’s no wonder that conventional policy may seem to be inadequate.
In SA, the problem is often with the alternatives, which seem to offer nothing that is sustainable or would not make an admittedly disastrous situation even worse. And when it comes to a cautionary tale on the dangers of trying to use monetary policy to deal with structural problems that keep the economy underperforming, Turkey has done SA a good service.
After finance minister Enoch Godongwana unveiled his
medium-term budget policy statement in November, ratings companies S&P Global and Moody’s Investors Service
decided not to release reports on SA, opting nothing had materially changed as a result of the statement, which largely stuck to the script written by his predecessor, Tito Mboweni.
Last week, Turkey also attracted the attention of ratings firms. Fitch Ratings changed Turkey’s outlook to negative from stable, and the move was linked to the resignation of its finance chief in the middle of a currency crisis.
In recent weeks, the rand got caught up in the headlines about the worsening Covid-19 situation with the emergence of the Omicron variant and the pace at which the US Federal Reserve will remove monetary stimulus, something that may hurt demand for assets denominated in the local currency. But while we’ve been excited about whether the rand trades at more or less than R16/$, the Turkish lira has been in a universe of its own.
According to Fitch, the Turkish currency had dropped 38% between September and when it issued its report on December 2. For the year so far, it had lost a whopping 46% of its value on attempts by President Recep Tayyip Erdogan to politicise the central bank, firing governors and replacing them with those who would follow his unorthodox stance that higher interest rates cause inflation, and therefore cut policy in the wake of consumer prices growing at about four times the official target.
“The central bank’s premature monetary policy easing cycle and the prospect of further rate cuts or additional economic stimulus ahead of the 2023 presidential election have led to a deterioration in domestic confidence, reflected in a sharp depreciation of the Turkish lira, including unprecedented intraday volatility, and rising inflation,” Fitch said. “These developments create risks to macroeconomic and financial stability and could potentially reignite external financing pressures.”
The firing of three central bank governors in the past two-and-a-half years has destroyed credibility in Turkey’s policymaking, and the resignation of Lutfi Elvan, the last official seen as a defender of the institution’s independence within government, was the latest nail to the coffin.
SA’s jobs numbers are horrific, but it should be wary of merchants of magical solutions, who would only make things worse. Turkey, and Argentina before that, shows where that road leads. With capital set to be scarce anyway due to policy moves by the US Fed, SA will do well to avoid similar mistakes.
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