By Alexander Winning, Olivia Kumwenda-Mtambo and Tom Arnold for Reuters
The rand plummeted to R15,12 against the dollar last week after a row between an arm of the ANC and the Reserve Bank.
The row was about the role of the country’s central bank, the South African Reserve Bank. It is unnerving investors because it is being driven by bitter factional battles rather than sober policy debate.
The conflicting policy views came as a fresh blow to the economy, after political uncertainty, increasing living costs and decreased investor confidence have ravaged the market.
Broadening the South African Reserve Bank’s remit to promote jobs and growth as well as taming inflation would not be seen by analysts as a problem per se, given other central banks including the U.S. Federal Reserve have similar dual mandates.
The worry is that the push to change the bank’s mandate is coming from a left-wing camp within the ANC that wants President Cyril Ramaphosa to change tack on a range of policies – and is using the Reserve Bank as a battering ram, some ANC members say.
The damaging public row over the bank’s role comes at a time Ramaphosa is trying to build confidence in the economy by tackling long-standing issues such as inefficient state enterprises and corruption.
“This is about the internal politics of the ANC and the factions that are fighting for influence,” said Melanie Verwoerd, a former ANC lawmaker and political analyst.
The ANC is a broad ideological church that has governed South Africa since the end of white minority rule, but it is deeply divided over how to deal with the persistent poverty and unemployment that are hitting its support at the polls.
The row within the ANC surfaced on Tuesday when Secretary General Ace Magashule, part of a group of ANC leftists and populists, said the party had agreed to expand the central bank’s mandate to include employment and growth.
He also said the party wanted the government to consider quantitative easing, a policy widely used by developed economies after the global financial crisis to stimulate growth by pumping cash back into the economy.
Ramaphosa’s allies, including ANC economics chief Enoch Godongwana and Finance Minister Tito Mboweni, rubbished Magashule’s remarks. The ANC then issued a statement in Ramaphosa’s name on Thursday saying there had been no change in central bank policy.
But the South African rand tumbled, and has continued to fall, hitting its lowest level against the U.S. dollar since September 2018 on Friday.
The more moderate ANC faction aligned with Ramaphosa has been forced to cede ground in several policy debates, including land reform, since the president took office in February 2018. The fear is the same could happen with the central bank.
The South African Reserve Bank has built a strong reputation for acting independently and there is a danger its credibility could be tarnished if the more hardline wing of the ANC forces it to adopt different policies.
The economic implications for South Africa could be significant if the change is rammed through in a way that shakes the confidence of the investors who fund the country’s twin budget and current account deficits.
If the central bank had to focus on growth and jobs over inflation, it would be more likely to keep interest rates low, which could in turn weaken the rand currency.
Only one global ratings agency, Moody’s, still gives South Africa an investment-grade rating, but it is hanging by a thread. Moody’s has said in the past that the central bank’s credibility is an important factor in its ratings decisions.
Moody’s declined to comment on this week’s row.
But if the very public ANC squabble pushed Moody’s to relegate South African debt to “junk” status, billions of dollars could leave the economy, analysts say.
Wayne McCurrie, portfolio manager at FNB Wealth and Investments, said Magashule’s comments brought to mind the money-printing in neighbouring Zimbabwe that led to hyperinflation.
“Zimbabwe’s Reserve Bank kept interest rates too low and used quantitative easing to buy government bonds when the government was running unsustainable deficits. That ended up in disaster,” McCurrie said. “Sustainable jobs cannot be created by the central bank and its policies.”
Still, even if agreement is reached within the ANC, changing the central bank’s mandate would be complex. It could require changing the constitution and amending the Reserve Bank Act.
But analysts say even an attempt to change the central bank’s role could torpedo hopes of an economic recovery.
“Even if nothing happens, the risk of fallout is high and so any recovery can be derailed,” said Peter Attard Montalto, head of capital markets research at Intellidex.
Speaking privately, ANC members aligned with Ramaphosa say the Magashule-led group is using the debate over the central bank to stymie the president’s agenda.
The more attention Ramaphosa has to pay to party squabbles, the less time he can devote to fighting corruption and pursuing reforms which could hurt his opponents’ interests, they say.
Members of Magashule’s camp say there is significant support in the party for the central bank taking a more active role in stimulating the economy.
Some who want the central bank to change see it as a bastion of white privilege that hasn’t done enough to help the economy more than two decades after the end of white minority rule. They also accuse Ramaphosa of cosying up to business interests.
“We are a developmental state. The central bank should also play a developmental role,” one source told Reuters.
Magashule did not respond to a request for comment.
The idea of a central bank more focused on job creation resonates with important ANC allies such as the South African Communist Party, which has publicly endorsed Magashule’s message, and labour unions frustrated at losing members through job losses in sectors such as mining.
Ramaphosa has supporters from across the political spectrum, so he has to be cautious in how he responds to the row.
Jan Dehn, head of research at emerging markets investment manager Ashmore Group, said it would be a mistake to change the South African central bank’s role for political reasons.
Though emerging markets-oriented asset managers aren’t expecting the mandate to be changed any time soon, they are monitoring the situation closely.
Other emerging market central banks such as in Turkey are regularly subject to political pressure, making investors wary of putting their money there.
“In the Turkish case the government has always focused on growth and doesn’t see a trade-off between growth and inflation,” said Ferhan Salman, senior economist at Bank of America Merrill Lynch. “I don’t think Ramaphosa is of the same view.”