Governor of the year: Lesetja Kganyago

The future promise of South Africa in the post-apartheid era, as set out by African National Congress (ANC) leaders such as Nelson Mandela and Oliver Tambo, has waxed and waned in the past decade. But the strength of the constitution they put in place, and the integrity and accountability they instilled in some public institutions and policymakers have all continued unabated, with the South African Reserve Bank and its governor representing an excellent case in point.

The Sarb acts as a beacon of competence and independence not just for South Africa, but for central banking in the African continent as a whole. And its current governor, Lesetja Kganyago, who took the helm in 2014, has enhanced the Sarb’s reputation as he has striven to make informed policy decisions, improve operations and build capacity, while standing firm against unwarranted political interference in his effort to serve the people of South Africa.

Kganyago’s steady hand and passionate defence of the Sarb’s ability to carry out its mandate have proven to be particularly important during the past 12 months, when years of economic mismanagement by the government and intense political infighting ahead of an ANC leadership contest came to a head.

The first bout of turbulence emerged after president Jacob Zuma fired South Africa’s finance minister Pravin Gordhan in March 2017. Gordhan had been hastily appointed to the ministry in December 2015, after Zuma unexpectedly replaced another finance minister, Nhlanhla Nene, with a backbencher. The decision to remove Nene caused a rapid fall in the rand and equity markets, forcing Zuma to bring in Gordhan, who set about implementing an action plan aimed at bolstering market sentiment and maintaining South Africa’s investment grade debt rating.

It has been alleged that Gordhan’s dismissal – at the same time as another eight ministers – may have been part of an effort to prevent him from pursuing investigations and acting against individuals believed to be involved in the ‘state capture’ of public institutions. In an open letter published in August 2017 (after the event), President Zuma’s son, Duduzane Zuma, alleged Gordhan had pressured the Sarb to close his bank accounts as well as those linked to his business partners, the Gupta family. Whatever the reasons, the removal of the finance minister contributed to the rand falling 163 cents from ZAR12.31 to the dollar to ZAR13.94. And rating agency Standard & Poor’s cut South Africa long-term foreign currency sovereign credit rating to sub-investment grade, with a continuing negative outlook. Fitch Ratings followed suit, also slashing South Africa’s domestic debt rating to junk.

The Sarb, while committed to anchoring inflation expectations within its 3–6% range over the medium term, communicated its continued commitment to sound macroeconomic policies and their consistent and predictable implementation. It also called for a continued collaborative effort by government, business and labour to boost domestic and international investor confidence.

Clash over the constitution

Matters deteriorated once again in June 2017, when the country’s public protector, Busisiwe Mkhwebane, ordered parliament to amend South Africa’s constitution to change the Sarb’s mandate, effectively putting an end its inflation-targeting regime.

The attack on the Sarb by the public protector emerged from her investigation into the Sarb’s conduct during the Absa-Bankorp bank rescue in the 1980s and 1990s. Former Sarb governor Tito Mboweni had at the turn of the century commissioned High Court judge Dennis Davis to head a panel of experts to investigate the matter, amid allegations that “billions of rands” had been stolen and taken out of the country. In 2002, the Davis panel found that the arrangement put together by the Sarb to rescue Bankorp from collapse had fallen outside its powers, but discovered no evidence of money having being stolen.

The public protector noted in her 2017 investigation that the Sarb had failed to recover the full amount of money due to it as a result of Bankorp’s collapse. So Mkhwebane pursued an investigation that included changing the Sarb’s mandate from being based on “protecting the value of the currency” to ensuring the “socioeconomic well-being” of South Africans. The investigation was treated seriously, as the public protector is a state institution set up under the country’s constitution to support and defend democracy.

Kganyago immediately leapt to the Sarb’s defence. “The reserve bank is respected because the people who are leading the institution are acting according to the constitution. I am acting according to the constitution, and I am acting independently, without fear, favour and prejudice,” said Kganyago, in a clear reference to section 224 of South Africa’s constitution. “It is then for South Africans to say yes, we respect this institution, and when the institution is under attack, they should be able to say: hands off our reserve bank.”

Kganyago ultimately received support from international observers and a cross-section of South African society, including the new finance minister, Malusi Gigaba, who stated: “We need to protect at all times the independence of the South Africa Reserve Bank so we don’t subject it to undue influence from anybody.” In an open letter, entitled Hands off the Sarb, 72 signatories described Mkhwebane’s actions as an “assault against the remaining institutions in the state sphere that stand for good governance”.

The Sarb also initiated court action against the public protector.

Kganyago defended the Sarb’s mandate, stating that maintaining the value of the currency was an essential part of achieving balanced growth, adding that there was nothing in the Sarb’s mandate that forced it to ignore growth when setting monetary policy. He also warned that an ill-considered mandate change could trigger a further downgrade of South Africa’s sovereign credit rating. These were not hollow words.

Rating agencies themselves were becoming increasingly worried about the attack on the Sarb. “The timing of the public protector’s report (after a major cabinet reshuffle and before the ANC policy conference) points to growing political pressure for less independent monetary policy‚ a key pillar in our assessment of South Africa’s gradually deteriorating institutional strength,” said Moody’s Investors Service in late July.

In its legal response, the Sarb stated that the public protector had stepped outside her constitutional jurisdiction. The Sarb’s lawyers subsequently also claimed that Mkhwebane, who was appointed by Zuma, had met presidency and state security officials to speak with them about the case against the Sarb, despite the case having “nothing to do with the presidency”. The Sarb called for a full transcript of the meeting from the public protector.

Before the latest allegations were made by the Sarb, on August 15, the High Court ruled in the Sarb’s favour, with judge JR Murphy throwing out the public protector’s case, saying her actions represented a “grave threat to an economy already crippled by a number of serious problems”.

In response, Mkhwebane formally retracted her effort to change the Sarb’s mandate. But she maintained that its mandate was “narrowly stated” and that it was “not evident that the socioeconomic well-being of South Africans” featured in the Sarb’s assessment of whether or not to offer support to Bankorp during the apartheid era.

Legal proceedings and other challenges continue to rumble on, with the ANC – while coming out in favour of not changing the Sarb’s mandate – supporting efforts to nationalise the Sarb, whose complex shareholdings were restructured earlier in 2017. But the ANC offered no timetable, and the Sarb is actively resisting these efforts.

Expanded footprint

Despite the ongoing legal battles, Kganyago continued with his effort to improve operations at the Sarb by implementing measurable objectives and deepening understanding of the monetary policy process. And he streamlined its physical footprint, closing branches in Port Elizabeth, East London and Bloemfontein, while converting others into cash-handling centres.

Despite the ongoing legal battles, Kganyago continued with his effort to improve operations at the Sarb by implementing measurable objectives and deepening understanding of the monetary policy process

The Sarb also started to implement a key reform that Kganyago has worked on and pushed for many years – to embed the central bank’s financial stability mandate, as well as its supervisory functions, by establishing the Prudential Authority within the central bank. These powers were formally granted via the Financial Sector Regulation Act, signed into law by President Zuma in August 2017, after its bill form passed a parliamentary process. “With the bill tabled in parliament in October, it gives me a sense that this work – which I had carried on when I was deputy governor – has finally started to come to fruition,” Kganyago told Central Banking in 2016.

The Sarb also took steps to introduce insurance for South African depositors. It issued a public consultation on the development of a deposit insurance scheme to protect “less financially sophisticated” depositors from bank failure. In the document, published on May 30, the central bank set out the parameters for an “explicit and privately funded” system, with a specific focus on mandate, governance, membership and funding arrangements. The aim would be to provide ZAR100,000 of cover per depositor per bank.

Watching the economy

Kganyago has striven to check inflation while keeping a watchful eye on the South African economy, which experienced slow growth in 2017 (2% GDP growth in the third quarter), after falling into recession in 2016, and still has stubbornly high unemployment (around 28%).

His November 2017 assessment of economic problems was pointed when he referred to “regulatory and policy uncertainty” as well as “corruption and a lack of direction in some areas” that have “sapped consumer and investor confidence” and “weakened private sector investment”. He is also aware that yield-hungry foreign investors now account for around 40% of domestic currency sovereign debt holdings, versus about 7% before the global financial crisis, making South Africa more prone to reversals in foreign investment sentiment.

But Kganyago also points to some positives.

This includes South Africa’s current account and budget deficits being smaller than in the past, making the rand more resilient to risks. The Sarb has also bolstered its foreign exchange reserves – which it is committed to use only if moves in the exchange rate have an impact on its price stability target – to $50.7 billion by the end of 2017.

Continued weak economic climate, combined with political uncertainty ahead of the ruling ANC’s leadership contest in November, added another dimension to the Sarb’s monetary policy calculation, as Kganyago sought to find the balance between inflation and the need to foster growth.

Getting inflation on track

Since taking over as governor, Kganyago has taken an aggressive line on inflation, keen to anchor expectations at 4.5%, the midpoint of the Sarb’s mandated inflation target range of 3–6%. From 2014 to early 2016, the central bank hiked interest rates from 5% to 7%, but the slowdown in growth put the Sarb under pressure to reverse its path. It held its position, however, despite the economy slipping into recession. Then, in April 2017, inflation finally fell below 6%, allowing the monetary policy committee to cut rates for the first time in more than five years.

Inflation has since remained within the Sarb’s target band, although Kganyago appears to have settled for it being anchored towards the top end, rather than the midpoint – at least, in the short term. But the governor has stated that the path of monetary policy could be reversed, should inflation threats re-emerge.

International recognition

Kganyago is also highly active in his dealings with other central banks, both in Africa and beyond, as well as with the International Monetary Fund. Kganyago is chair of the Association of African Central Banks, chair of the Committee of Central Bank Governors in the Southern African Development Community and co-chair of the Financial Stability Board Regional Consultative Group for Sub-Saharan Africa. He is also the chair of the FSB’s Standing Committee on Standards Implementation.

 He played an effective role in Bank for International Settlements meetings, particularly when he was deputy governor. “He is a good economist with a fine sense of what is practical,” says one official who has frequently attended international governor meetings. “In BIS meetings, he was able to put difficult questions to the governors of the big central banks.”

This reputation has helped him to secure the prestigious post of chair of the International Monetary and Financial Committee – the policy advisory committee of the board of governors of the IMF – for a term of three years. He replaces Agustín Carstens, the former governor of the Bank of Mexico, who became general manager of the BIS late last year. Kganyago is the first governor from sub-Saharan Africa to hold the post.

Integrity, integrity, integrity

The ANC has formally congratulated Kganyago on his appointment to the IMFC, and he also received a strong endorsement in 2017 from the Banking Association South Africa.

“Kganyago has shown that rare trait among civil servants these days – courage and a willingness to fight for the integrity of the institution he represents,” said the association. “He is a beacon of strength and stability in government. We need more of this, in our central bank, national Treasury, and right across the public sector.”

Others agree with that sentiment.

“He has stood firmly in a very difficult political environment, including when President Zuma was hounding the minister of finance,” adds a long-serving international central banking official. “The Sarb is still viewed as a beacon of good central banking by the rest of Africa, and Kganyago has furthered this.”

The Sarb is still viewed as a beacon of good central banking by the rest of Africa, and Kganyago has furthered this

International central banking official

An insight into what drives Kganyago can be gleaned from his speech at the University of Pretoria to mark the hundredth anniversary of Tambo’s birth. Kganyago referred to Tambo as “integrity, trust and accountability personified”. And he reminded his audience that it was Tambo’s wisdom in helping to create the constitution that ensured the independence of the Sarb, adding that the central bank also exhibited “integrity, trust and accountability”: “The Sarb does not bow to any pressure, whether it be political or from the private sector. But the Sarb does account to the people of South Africa through parliament.”

While it was an astute move to connect the Sarb in the eyes of South Africans with one of the nation’s most revered sons, there appeared to be more to it than that. The governor also spoke about the power of Tambo’s speeches lying in the “clarity of his thoughts”, adding that this was what helped him to succeed in “keeping together people of diverse backgrounds united”.

It appears that Kganyago strives to live up to the high standards set by Tambo and the founding fathers of post-apartheid South Africa, by exhibiting strong levels of personal integrity. The Sarb governor, similarly, has an ability to unite people from different backgrounds, be they the administration staff at Sarb headquarters in Pretoria or top public policymakers in Basel.

As he told Central Banking in an interview in February 2016: “I am standing on the shoulders of giants, and I am very fortunate for the institution my predecessors have left me.”

There can be little doubt that his eventual successor will stand even taller thanks to Kganyago’s determined leadership during a particularly turbulent 12 months.

The Central Banking Awards were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Rachael King, Victor Mendez-Barreira, Iris Yeung, Joel Clark and Tristan Carlyle