Reserve Bank governor Lesetja Kganyago. Picture: GALLO IMAGES/BUSINESS DAY/FREDDY MAVUNDA
Reserve Bank governor Lesetja Kganyago. Picture: GALLO IMAGES/BUSINESS DAY/FREDDY MAVUNDA

It wasn’t that long ago that collapses in Turkey’s currency would reverberate across emerging markets, with the rand getting caught in the crossfire.

The rand’s slump in the middle of 2018, though it had domestic causes such as the drive towards expropriation without compensation, coincided with Turkish President Recep Tayyip Erdoğan railing against “economic terrorists on social media” and a slump in the lira. That was probably in reference to then US president Donald Trump, who had just imposed sanctions and boosted tariffs on Turkey.

Erdoğan was at it again at the weekend, firing a central bank governor who didn’t do his bidding or subscribe to his unconventional economic theory that higher interest rates cause faster inflation. That caused the lira to drop about 15%, a move that will add to the country’s inflation problem.

In what will be a sign that investors have become more sophisticated in analysing emerging markets and have discarded the one-size-fits-all attitude, the rand hardly moved. On Monday, a public holiday in SA, it gained just more than 0.3%. When local traders returned it only fell slightly.

The rand has in the past been a barometer of sentiment for emerging markets.  With SA having liquid financial markets that are large relative to the economy, traders would sell the rand to make up for losses in other countries where it’s not so easy to move money out.

It has been resilient in 2021 even as emerging markets suffered due to investors pricing in faster inflation and tighter policy in developed countries.

Only two of 24 emerging-market currencies tracked by Bloomberg have gained against the dollar in 2021. While the rand wasn’t one of them, dropping 0.3%, it is far from being the worst. The Brazilian real has fallen 8.2% while Turkey’s lira is down just more than 5%. Over the past six months, the rand is up just more than 15%.

This outperformance has happened even as the other two countries raised  interest rates while SA hasn’t moved since July when the repo rate was cut to a record low of 3.5%. And it’s most likely that the rate will stay at that level when the Reserve Bank’s monetary policy committee (MPC) concludes its meeting on Thursday.

The Bank and governor Lesetja Kganyago have had many critics in SA for their alleged conservatism. Even before the Covid-19 outbreak, there were calls for more adventurous, or rather reckless, policy. ANC secretary-general Ace Magashule’s June 2019 call for “quantity easing” comes to mind. More respected names in the economic policy field made similar calls about a year ago as the Covid-19 lockdown closed the economy.

Holding this latest meeting just a week after central banks in Turkey, Russia and Brazil tightened policy, Kganyago will probably be feeling vindicated and point to SA’s inflation rate that has been
entrenched at the lower end of the 3% to 6% target range, averaging 4% over the past three years.

Turkey, on the other hand, was forced into a radical hike that led to the firing of its central bank governor because political meddling in monetary policy had seen inflation jump to more than 15%. While nowhere near as bad, central banks in Russia and Brazil hiked because their inflation rates are running above target and they need to regain market credibility that they can bring them back.

The day-to-day activities of credible and independent central banks probably fall in the basket of things that people don’t value until they are gone, by which time their economies have become basket cases and their money is worthless. Ask any Venezuelan or Zimbabwean.

Recent events in global markets, and with SA’s rates negative when future inflation is taken into account, a cut is probably out of the question, and it’s more likely that the two members of the MPC who argued for a cut in January will fall in line with the majority.

But prior success in taming inflation means a hike is also unlikely. It also means, as the economy weakens again due to the government’s slow pace of administering vaccines and averting new Covid-19 waves and lockdowns, that monetary policy will at least be able to stay supportive.


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