Breakingviews - South Africa offers Erdogan an inflation lesson

A street money changer counts South African rands in Harare, Zimbabwe, May 5, 2016.

LONDON (Reuters Breakingviews) - South African central bank boss Lesetja Kganyago owes Tayyip Erdogan a thank you. In firing his monetary policy chief at the weekend, the Turkish president triggered a plunge in his country’s currency and bonds. It’s a dramatic reminder to Kganyago’s political masters of what could go wrong if they were to start meddling in interest rate policy.

At more than $600 billion, Turkey’s economy is roughly double the size of South Africa’s and boasts a more developed manufacturing sector. Their shared features include heavily traded currencies and large external funding requirements, making them vulnerable to wobbles in global investor sentiment. When one gets a thump, the other suffers secondary bruising. Take August 2018, when the rand fell 15% in two days in reaction to another Erdogan-inspired slump in the lira.

Since then, however, the ties have loosened. On Monday, the rand even gained while the lira shed more than 10% after the abrupt dismissal of Kganyago’s Turkish counterpart. The primary reason is inflation. Erdogan’s view that high interest rates cause, rather than prevent, high prices contrasts with Pretoria’s orthodox monetary policy views and adherence to a 3%-6% target. And while the Turkish leader has cycled through four central bank bosses in two years, Kganyago is only the fourth person at the helm of the South African Reserve Bank since apartheid ended in 1994.

South Africa has reaped the benefits as inflation has fallen over time. At just 3.2% in January, it gives Kganyago scope to keep policy loose to boost the recovery, even if the yield-hungry foreign investors that hold a third of the country’s domestic debt don’t like it. Few emerging-market central banks have that luxury.

This is not to say South Africa is in the clear. Its economy is in the doldrums, this year’s budget deficit is likely to be 14% of GDP, and ratings agencies have downgraded its credit to “junk”. The steepness of its yield curve also points to longer-term concerns about the government’s ability to pay its dues: in 2024, debt service costs will consume 16% of government spending. Politicians in Pretoria are also prone to occasional central-bank bashing when it suits. Thanks to Erdogan, Kganyago’s riposte will be all the stronger.


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