Why the Reserve Bank’s independence is being threatened now

 ·30 Jun 2017

Research analyst at Nomura, Peter Attard Montalto says that markets are not taking the threat to the South African Reserve Bank’s independence seriously enough, and that even if nothing changes, it could inflict major damage to the economy.

In an investor note sent out on Friday, Attard Montalto said that the recent move against the Reserve Bank by the public protector, aiming to change its Constitutional mandate, is happening in a very specific context:

President Jacob Zuma’s ANC has its back against the wall, with a dire need for access to funds, and also somewhere to place the blame for the country’s poor economic performance.

“The Zuma faction within the ANC sees the SARB as a blockage to more radical transformation within the financial services sector, including allowing banks to maintain too tight a set of credit standards that is seen as restricting credit from black SMEs and black industrialists, as well as not applying enough pressure to banks on black ownership and black management criteria,” the analyst said.

“The SARB is also, through its systematic imposition of a consistent rules-based system, seen as a blockage against bank ownership by politically connected parties and a frustration at its application of exchange controls in the same vein.”

According to Attard Montalto, the ANC is also currently struggling to gain traction with the narrative that the country’s low growth is the fault of the global economy or the domestic private sector.

“As the 2019 elections approach, we expect the SARB to be set up to take the blame, facing criticism for keeping monetary policy too tight since 2008, being too inflation-focused and not targeting growth or job creation enough.”

The analyst said the Nomura holds the view, agreeing with the SARB, that most of the low growth is due to political, policy and regulatory uncertainty as well as a failure to push forward meaningful structural reform – not the fault of monetary policy.

Attard Montalto said that it is unlikely that government will succeed in changing the Constitutional mandate of the SARB, as it lacks the two-thirds majority to do it, and opposition parties, even the EFF, would be loathe to support a measure that would invariably aid state capture.

However, even the threat of doing so should send alarm bells ringing among investors he said.

“A lot of damage can be done in the short term to investors’ sentiment even if there are no changes to the SARB’s objective or mandate.”

“The problem for the SARB (and investors in the long run) is that markets are far too near-sighted here, and too willing to dismiss the threat as being too far away or unlikely to happen because of still-overestimated expectations of a Ramaphosa camp win in December,” he said.

This near-sightedness is a persistent problem, as was seen when Pravin Gordhan was fired earlier in the year.

“The lack of a severely negative market reaction at the end of March between Pravin Gordhan’s recall from London and his firing a few days later did not prevent that event – so we believe that a lack of market reaction now will directly embolden the forces attacking the SARB,” the analyst said.

Even if there is no action taken to change the SARB’s mandate, it should be seen as government putting increasing pressure on the Bank which has long had “ongoing but healthy tensions” with National Treasury in the past.

While SARB is likely to fight fiercely for its independence – through the courts if it has to -it must tread very carefully, the analyst said.

Read: Public protector either ignored or misunderstood us: Absa

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