South African central bank chief Lesetja Kganyago owes Tayyip Erdogan one. By firing his head of monetary policy, the Turkish president caused a currency and bond crash. It’s a dramatic reminder to Kganyago’s political bosses of what could go wrong if they started meddling in rate politics.
Erdogan’s view that high rates cause prices to rise contrasts with Pretoria’s orthodoxy
The Turkish economy is twice that of South Africa and has a more developed manufacturing sector. They coincide in the high volume of trading of their currencies and in their great needs for external financing, which makes them vulnerable to faltering in investor confidence. When one receives a blow, the other suffers a bruise. For example, in August 2018, when the rand fell 15% in two days in reaction to another Erdogan-inspired crash in the lira.
But the ties have been loosened. Last Monday, the rand even won as the lira plummeted. The main reason is inflation. Erdogan’s view that high rates cause, rather than prevent, price rises contrasts with Pretoria’s orthodox view and its adherence to a 3% -6% target. And while the Turkish leader has gone through four central bank heads in two years, Kganyago is only South Africa’s fourth since apartheid ended in 1994.
South Africa has reaped the benefits of falling inflation. From just 3.2% in January, it allows Kganyago to maintain a flexible policy to boost the recovery, even though it may not appeal to return-hungry foreign investors who own a third of the country’s debt. Few emerging can afford it.
It does not mean that he is safe. Its economy is in the doldrums, this year’s deficit will be 14% of GDP and the agencies have reduced their credit to garbage. Its yield curve also points to long-term concerns about the government’s ability to pay: in 2024, debt service costs will consume 16% of public spending. Politicians also attack the central bank when it suits them. Thanks to Erdogan, Kganyago’s reply will be even stronger.