Our Thoughts On the South African Economy

Our latest thoughts on South Africa come from a “Governor’s talk” at the IMF annual meetings in Washington DC on 23 October 2024 with central bank Governor Lesetja Kganyago. His presentation started with  tribute to Tito Mboweni, “Governor Number 8” who had introduced flexible inflation targeting. He had taken major steps to improve central bank communications not just with parliament but with the general public.  

Governor Kganyago started by discussing how South Africa dealt with the inflation surge. The central bank saw in 2021 that inflation was starting to rise. They Initially thought they would be able to see through the shock. But there were a multiplicity of shocks. So, in November 2021 they started to raise rates. They were not the first emerging market central bank to do so: Brazil started early in 2021. Initially, this was seen as “taking away the accommodation”.

South African inflation peaked at 7.8% year-on-year, lower than in advanced economies.  More recently we have seen global supply chain pressures easing, the South African rand’s exchange rate appreciating after the recent election and oil prices moving lower.

The combination of the policy actions that were taken, the credibility of the central bank and beneficial supply shocks brought inflation down. Inflation expectations, however, tend to be backward looking and Nowcast forecasts suggest inflation will remain about 4% until mid-2025.

Governor Kganyago pointed to the strong correlation between South Africa 10 year yields and those of the US. That restricts domestic policy flexibility.

South Africa is often seen as a commodity-related economy. But commodities are a “double-edged sword. In an upward cycle for commodities, South Africa’s import bill for oil goes up; but at the same time they benefit from higher prices for iron ore and coal exports. What is important is the overall movement in the terms of trade.

One positive development recently is that electricity outages have diminished greatly. New capacity has come in, with a lot more from renewables.

In the run-up to the recent election, a lot of negativity about South Africa was priced in but the coalition was put together in 30 days and is working well. Constraints to growth are being dealt with one by one.

“South Africa needs macro stability” in Governor Kganyago’s view. But a long period of stability pre-pandemic meant that structural reforms were not taken. Crisis is often required to get reform (my view, but probably his as well).

Potential growth is probably only 1.3%. So the output gap is just about closed now.

The late Governor Tito, who became finance minister in 2018, started fiscal consolidation straight after the end of Covid. That has helped put South Africa’s fiscal position on a stronger footing.

One way in which monetary policy differs from other countries is the extent to which the exchange rate is allowed to move. Across the region, there is not much ability to resist exchange rate movements although those with massive reserves can intervene. Only 30% of trade in the rand takes place onshore. “It’s easy to intervene when the currency is going up” Kganyago commented. The level of reserves now is “alright”. South Africa doesn’t want to be an outlier amongst its peers. 

Throughout his talk Governor Lesetja Kganyago was open, honest and frank. It's rare – I’ve never seen it before – for central bank governors to be swamped with requests for selfies after their talks. But that’s what happened to him. His talk changed my view, in a positive way, of South Africa.