South African Reserve Bank Governor Lesetja Kganyago discusses US monetary policy, his outlook for economic growth and the impact of a Trump administration on the country. He speaks with Francine Lacqua from the World Economic Forum in Davos, Switzerland on “Bloomberg Daybreak: Americas”.
Francine Lacqua, host, Bloomberg Surveillance, Bloomberg Television: We’re four days from the inauguration. What does a Donald Trump presidency mean for South Africa?
Lesetja Kganyago, governor, Southern African Reserve Bank: It’s difficult to figure out exactly what it means because we’re not clear about what the policy is. But there are a number of scenarios that one would have to look at. There’s been talk of a fiscal stimulus. If there is a fiscal stimulus, you would like to believe that the US authorities will do a fiscal stimulus that will be in the best interest of the economy.
And if it leads to, the US economy growing, this we can see the market already pricing that it would at lead to an appreciation of the dollar. And appreciation of the dollar will have a couple of impacts on the emerging market economies.
The first channel [sic] will be through the trade channel [sic] to the extent that you have got a stronger dollar in relation to emerging market currencies, emerging market exports will become more competitive, depending of course on whether world demand is there.
And the second channel [sic] is the finance channel [sic] to the extent that there are countries which have dollar-denominated debt and appreciation of the dollar will mean rising debt burdens in those countries. But what we would be seeing is that if the US economy is then also beginning to grow it might be giving the Fed room to normalise monetary policy faster, which would lead to a further reversal in capital flows to emerging markets.
Lacqua: But Governor, we just heard from Donald Trump today saying that he’s worried about a US dollar which is too high. Again, how difficult is it for you to look at levels of rand inflation when you have a US president, soon to be president, that can actually move currency with a tweet?
Gov. Kganyago: Well presidents move currencies all the time, it just happens this one is using Twitter. Others used ordinary speeches and other platforms. What we are facing now is that we are facing an increasing environment of uncertainty, which makes determining policy is a significant challenge. Especially the way we do not know where the actual policy is actually going.
Well if the concern from the US is that the dollar is too high, well the policies that are talked about, if they materialise could lead to an even stronger dollar than we are actually having.
Lacqua: So what is your prognosis for the rand at the moment? And if we have a sharp devaluation can that really spur inflation in South Africa?
Gov. Kganyago: Well in a way, the way in which we look at the impact of a possible US fiscal stimulus, the channels that we looked at were the channels very similar to those of the normalisation of US monetary policy. That it would lead to an appreciating dollar which would lead to a re-alignment in exchange rates globally. And from a monetary policy perspective, what we would then be watching is whether the depreciation of the currency fits itself into a domestic price formulation.
The situation gets complicated by the recent agreement by OPEC because that meant that the oil price also began to rise. And a combination of higher oil prices, an appreciating dollar, which leads to a depreciation of emerging market currencies, and food prices now which are rebounding from their historic lows. A combination of those could lead to a very challenging environment for monetary policy.
Lacqua: Governor give me a level. What is the level that on rand dollar that actually feeds through inflation?
Gov. Kganyago: Well I wish we knew. Because if we knew then–
Lacqua: Or a range.
Gov. Kganyago: Well if we knew we’d just plug it into the model and go with it. The thing here to realise is that there is more than the exchange rate that drives inflation. You have, as I mentioned, you have got food prices, you have got the oil price–
Lacqua: Oil price.
Gov. Kganyago: You have got the domestic factors like the output gap. You have got domestic unit labour cost. And all of those variables could move in different directions which make it difficult to take one variable and say this is the contribution of this variable to inflation.
We have for a long time been working on a pass-through co-efficient of 0.2 that a 10% depreciation of the rand would lead to a rise in inflation of 0.2. But that pass-through has been relatively muted not just for South Africa, for the entire emerging market universe. So models have to be recalibrated. How much will this depreciation of the currency lead to a rising inflation? We do not know.
Lacqua: Right but Governor what does that mean for actually setting monetary policy? Does it mean that you’re more in a wait and see mode as you figure out all these divergences and complications that you’re talking about?
Gov. Kganyago: No what we actually spelled out was that we are on a tightening cycle for monetary policy. And we spelled out that the factors that drive inflation actually mean that we might be reaching the end of the tightening cycle.
Gov. Kganyago: We didn’t say we have reached the end of the tightening. We might be reaching the end of the tightening cycle. But we also cautioned that should the factors that have led to the stance that we have change, the MPC will then review its stance in the light of that. I wish I could tell you. Unfortunately if MPC next week, I can’t tell you.
Lacqua: I know, but you’re saying, and again I know it’s word for word, but that you may be close right, to ending the rate hiking cycle?
Gov. Kganyago: Yes.
Lacqua: Are you less close now to ending that than you were a couple of weeks ago? Because of the latest tweets and policies from Donald Trump?
Gov. Kganyago: What I have told you is what we had at November–
Gov. Kganyago: Which was our last MPC meeting. We have meeting–
Lacqua: And has that changed?
Gov. Kganyago: Well we will know next week if it has changed. We will receive a new forecast from the staff, we will have significant deliberations, we will assess all of these factors. All I’m saying is that it becomes more complex if we do not know what is happening with the world’s largest economy.
Lacqua: Okay how much, and I don’t know whether you want to give me a percentage, but how much do you think the impact of US interest rates actually has on your monetary policy?
Gov. Kganyago: We do not follow US interest rates basis point for basis point. We only monitor US monetary policy to the extent that it would have an impact on the exchange rate, which would have an impact on capital flows to emerging markets in general and to South Africa in particular. And say does this impact lead to a rise in inflation? And if we believe it would lead to a rise in inflation, monetary policy, we’ll react.
By the way, it could also work in the other direction that it leads to a decline in inflation. But as it stands now the risks of that inflation outlook are on the upside.
Lacqua: Do you look at dot plots or do you look at what the markets believe that the Fed will do?
Gov. Kganyago: You know the dot, quite frankly I don’t know who still–
Lacqua: Looks at that.
Gov. Kganyago: Who still uses the dot. The markets run ahead of themselves. In the run up to the US election the market reacted because they thought that Mr Trump would become president and there was an outflow from emerging markets. There was movement in financial markets and then he got elected and the markets rallied because he had been elected.
So quite frankly I do not know what to read from those animal spirits. So what we do as the MPC is that we look at our own forecasts, our own analysis and our take of the South African economy and the pronouncement from the US policymakers in terms of what could be the trajectory of monetary policy in the US. Last year, for the best part of last year, the markets didn’t believe what the Fed was saying with respect to interest rates–
Lacqua: And now it’s changed.
Gov. Kganyago: And now it has changed.
Gov. Kganyago: It looks like they are now in the same direction and along the similar lines.
Lacqua: You talked about animal spirits. One of my favorite words when you talk about central policy, central bank policy, do you believe that there are more risks to inflation, to the inflation outlook that you talked about in November now than there were two months ago?
Gov. Kganyago: We will assess that next week. But in November we did say that the risks to the inflation outlook is on the upside.
Lacqua: And if you listen to the rhetoric about protectionism, this should have risen further. Is that a fair assessment?
Gov. Kganyago: Well that should be a [INAUDIBLE] and in a way the fact about protectionism, you know there is the thing to countries talking about wanting to protect their own market. It’s so illogical – you want to protect your own market but you want access to the markets of other countries. And one loses really what the logic is.
What is of concern about the noise about protectionism is that it is coming out of the world’s largest economy and should it materialise, you will expect the other developed economies to retaliate. And if they retaliate we are going to face a situation where global trade declines. And when global trade declines, you are going to have a significant impact on the livelihood of the majority of people in emerging market economies.
Lacqua: Which means that inflation goes up. What’s the likelihood of that scenario? Is it 25%? Is it 50%?
Gov. Kganyago: You know, the problem with that scenario is that you are getting into the realm of analysing what politicians would do. That is not quite a [INAUDIBLE] if you ask me what economists will do, I will tell you what economists would do.
Lacqua: Okay, a last question on growth okay? Is your expectation on growth of the South African economy changing because of all this talk on protectionism?
Gov. Kganyago: It would have an impact. At the moment it’s difficult to say what the impact is because you do not know what protectionist measures will come. Because different countries will be impacted differently. Our concern from the African continent for example is that if these fears about protectionism materialise, the biggest US policy engagement with the African continent on the trade side is African Growth and Opportunity Act (AGOA).
If not the benefit in terms of AGOA are repealed or are removed or are minimised, there’s got to be significant impact on African economies. AGOA led to significant benefits for African economies and if the rise in protectionism will lead to the repeal of AGOA, or a significant reduction in the benefits from AGOA you’ll see African countries adversely impacted.
Lacqua: Governor a very quick last question on political turmoil in South Africa. Are you worried for 2017?
Gov. Kganyago: Well we always worry about noise. South Africa is a very vibrant democracy. And some people even say that it’s actually a noisy democracy. These contestations take place in the greatest of democracies. The nicest thing is that we are not killing each other. We are having civilised discussions about it.