Emerging EMEA March 12, 2019 / 03:24 pm UTC

SARB Nationalization: Beyond a Political Slogan?

By Francesca Beausang

Bottom line: South African President Cyril Ramaphosa’s announcement on March 7 that the South African Reserve Bank (SARB) would be nationalized triggered a sell-off in the rand as markets associated nationalization with the end of SARB independence. The announcement is a political coup by Ramaphosa ahead of the May elections. Nationalization in and of itself does not equate with a SARB mandate change. However, it could evolve toward one if former president Jacob Zuma’s supporters dominate the African National Congress (ANC) again. This introduces upside risks to our 14.7 USDZAR end-2020 forecast.

Figure 1: How to Sink a Currency (USDZAR)

Source: Bloomberg, Continuum Economics

SARB Nationalization Per Se Is Not Problematic

Markets do not like it when the boundaries between politics and economics become blurry, and Ramaphosa’s statement on March 7 that the SARB should belong to the people is no exception (Figure 1). How problematic is his statement? Ramaphosa does not have any interest in risking a sovereign downgrade to junk, which would undoubtedly follow from a changed SARB mandate given South Africa’s already dire sovereign debt outlook. Only a handful of central banks have private shareholders like South Africa (Belgium, Greece, Italy, Japan, Switzerland and Turkey) and nationalization is not, by definition, a threat to the independence of monetary policy. In our view, Ramaphosa wants to score political points off the magic word of “nationalization,” which appeals to ANC voters who want to regain control over a corrupt state. In and of itself, nationalizing the SARB does not necessarily make a difference to its independence, as its mandate is written in the Constitution. 

How SARB Nationalization Could Become Dangerous

While there is nothing wrong with nationalization per se, two questions remain. First is whether nationalization is the start of something much worse. In a statement earlier this year, Ramaphosa said, “we would like everyone to focus on the creation of jobs,” which indicates that he wants to add employment to the SARB’s current priority of inflation. That sort of language is concerning in that it suggests nationalization may just be a stepping stone toward an eventual mandate change. The SARB is already set for a period of instability this year due to the replacement of hawkish governor Lesetja Kganyago (his term ends in November) and his two hawkish deputies Daniel Mminele and Francois Groepe. The timing of this attempted politicization of the Bank is unfortunate and will likely exacerbate the concerns of investors, who are already nervous about the strength of Ramaphosa’s mandate after the May elections. It is not a far cry from Turkish President Tayyip Erdogan’s hold on the Central Bank of the Republic of Turkey (CBRT), which caused the CBRT to delay its decision to hike rates until September 2018, thereby causing an inflation spiral. 

Second, what is the political significance of Ramaphosa’s about-face? His sudden turn on SARB nationalization is a concerning signal from a political point of view. The Economic Freedom Fighters (EFF) have been championing both SARB nationalization and expropriation without compensation, showing how EFF pressures drive the mainstream political agenda. However, the campaign for SARB nationalization began in 2017 under the impulse of a faction within the ANC led by Zuma’s supporters. They are in favor of looser monetary policy and more control over financial sector regulation and the Prudential Authority. Hence, SARB nationalization could be read as an early capitulation by Ramaphosa to the Zuma faction, which does not bode well for structural reforms. If we see more signs of this faction taking over, nationalization could certainly evolve toward a mandate change, and our end-2020 USDZAR forecast of 14.7 would have to be revised to the upside.

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Analyst Certification
I, Francesca Beausang, the lead analyst certify that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further certify that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.