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South Africa has strengthened its financial defenses, but the economy remains trapped in low growth, failing municipalities, and declining living standards. The Reserve Bank Governor, Lesetja Kganyago, suggests the country protects powerful incumbents, regulates too much, and is unwilling to take the risks needed to grow. But what interests is he talking about, and what exactly must change? Also, I imagine forecasting, scenario planning, and modeling must have become a lot more difficult for him and the MPC.
So, Governor, let me start with this, and we are living in a fast-moving and increasingly complex world. I wonder how difficult it's become for you and the MPC to both forecast, scenario plan, and model.
It has become more difficult, not that it was easy before.
It was difficult. Well, I'll tell you a word. The one thing that impacts on the decisions we make is our ability to paint an outlook of what we think the future looks like, and setting up policy for that environment. The impact of the policy decisions we make as the Monetary Policy Committee get felt 12 to 18 months down the line. And so, we invest a lot of resources, both technology and people, in forecasting what we think will happen to the economy over the next 2 to 3 years, and then set policy in that manner.
In an environment where key commodity prices like oil and exchange rate could move on the basis of a social media posting from someone powerful, it becomes very difficult to forecast. And then the question becomes, then how do you navigate in that environment? And you would notice that we now provide a forecast. And the way in which we had navigated this was we put on a forecast and we say, what are the risks to those forecasts? And so we will state there are upside or downside risks to inflation or there are upside or downside risks to growth. And then set policy on that basis. But now we are having to do scenarios to say, what if this happens or what if that happens? And so we will find that we have done scenarios about the oil price and we had to do scenarios now about the potential for an El Niño setting in.
Identify the channels through which those uncertain events would actually feed through the South African economy. And in a way say to economic agents, should this play out, this is how policy will adjust. Should it play out this way, this is how policy would adjust. And it is now becoming an increasingly common approach by central banks now to set out scenarios of what they think could happen in the economy.
And based on those scenarios, Governor, what do you see then as the biggest short-term risk facing the country right now?
It depends. I will talk to both growth and to inflation and say that with respect to inflation, we had identified geopolitical risks, which is central bank speak for saying that there are wars taking place and how those geopolitical risks would impact on a key commodity like oil. And in many instances you would find that central banks can navigate dealing with high oil prices. It's quite another where you also have that the price is not just high, but it is difficult to actually access the oil. We are fortunate in South Africa because we are still able to access the oil. But for the other countries that for example rely on oil going through the Strait of Hormuz or going through the Suez Canal, it becomes a challenge.
Be that as it may, even for countries like South Africa which are able to access the crude oil, it comes at a price. So, you have that. And again, if the price shock comes and you say, okay, the price has risen to this level and it stays there, you can set policy easily on that basis. But if it goes up and comes down in the manner that we have seen where it becomes volatile, it becomes very difficult to set policy. That is a risk to the inflation outlook.
But the challenges, these geopolitical risks have led to a situation where you are not just having an impact on the availability of crude and the price of crude, but it is now also impacting on the availability and access to fertilizer. Again, South Africa was fortunate when the war broke, we were already past our planting season. The planting season is coming and we are going to have to access fertilizer. Would we have access to that? Combine that with the possibility that we could have a severe El Niño. And if that sets in, it's going to also impact on food prices. So, there is a risk that food prices could be impacted firstly via the fertilizer and secondly through the impact of weather on agricultural production.
And of course on the growth side, oil is also an important input, an important energy source, etc. It does have an impact on growth, but the impact of the oil price is more pronounced on the inflation front than on the growth side. The other impacts to growth of course have to do with the global factors. Those global factors affect the demand for South African exports. But we still have our own domestic constraints. Every business has got to operate from a particular locality and if municipalities are not functioning optimally it has got an impact on economic activity.
And Governor, against that backdrop then you say that South Africa must take uncomfortable risks. I think your words. What is the single biggest risk then that you think we need to take right now?
You know, I talk to a lot of people and they like saying that and I say there isn't a magic bullet here. We had identified this and for South Africa the stuff that we had painted that has to be done that we identified. Government's program and response to that is Operation Vulindlela. To keep government honest, Business Leadership South Africa has got this BLSA tracker. It makes for fascinating reading. I try to visit that tracker once a week. It's only Thursday so I still have time to get through that tracker and it just paints the steps that we have to take in order to make progress and it would then also state where government is actually lagging behind in those circumstances.
So Operation Vulindlela then is targeting the right reforms. I think that's common cause but also moving too slowly. Who should be accountable for the delay?
