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Back on Track: SARB’s Plenderleith Reflects on 10 Years of Democracy

The end of Apartheid in South Africa in 1994 heralded a new era for that commodity-rich country. The intervening 10 years have been a period of intense change for South Africa. Here South African Reserve Bank Deputy Governor, Ian Plenderleith, talks candidly to Jennifer Coldwellat Profit & Loss about the changes that have taken place, both at SARB and within the South African economy.


South Africa has in the last 40 years been plagued by slow economic growth, rising unemployment and persistent poverty among the disadvantaged groups. However, following the end of Apartheid in 1994, the new government adopted a neo-liberal strategy to try and combat the problems caused by the Apartheid era and bring about accelerated growth and investment in the economy. Much has been achieved in the 10 years since democracy was established, and today South Africa is a middle-income, emerging market with a well-developed financial sector, a stock exchange that ranks among the 10 largest in the world, and a modern infrastructure.


Ian Plenderleith came to South Africa after 37 years with the Bank of England where he served as an executive director, responsible for the Bank’s financial market operations, as well as a member of the Bank’s Monetary Policy Committee. During his time at the Old Lady, he served as Private Secretary to the Governor of the Bank of England between 1976-79. He was also an alternate director of the Bank for International Settlements, Basel, and acted as a non-executive director of the London Stock Exchange from 1989-2001. This means that Plenderleith, who was appointed to the position of Deputy Governor of the South African Reserve Bank (SARB) in January 2003 for a three-year period, brings with him a wealth of experience that he plans to utilise to help the South African economy stay on track.


Growth Strategy


On joining SARB, Plenderleith says he discovered that the government had implemented a very responsible macroeconomic programme to deal with the economic and social malaise caused by the Apartheid system. It has solidly stuck to this on the fiscal side and, he suggests is now reaping the dividends it promised. SARB’s responsibility on the monetary side is inflation targeting. The government sets the inflation target as part of its economic strategy; it does this in consultation with SARB whose target is to keep CPIX inflation, which excludes home loan costs, between 3-6%. This was implemented instead of the previously applied ’eclectic’ monetary policy approach, in which intermediate objectives played a prominent role. “SARB has managed to achieve its inflation target over the past two years and the National Treasury has brought down the budget deficit to a manageable level,” Plenderleith says. “This has provided the foundation for faster economic growth.”


The Reserve Bank has independent responsibility for setting interest rates, done through its Monetary Policy Committee, which meets every two months. This is a major part of their responsibilities, according to Plenderleith, and has been quite a challenge initially because of the setback of the US recession in 2001 when the rand weakened sharply for reasons that he believes were frankly irrational and relatively short lived, but were nevertheless very disruptive. An impulse was delivered to inflation which caused it to rise and therefore SARB was forced to increase interest rates in 2002, which saw inflation at 11.3% in the latter part of that year. As the exchange rate recovered, inflation came down and was back within the target range by the latter part of 2003 and has been within this range for the last 16 months. “This meant that in 2003 we could bring interest rates down and that gave a considerable boost to the economy,” Plenderleith explains. “It led to a pick up in the growth rate of about 2% in 2003 to the third quarter of last year, which is 5.7% at an annual rate.


“The tremendous news is that this acceleration in growth is sustainable with inflation remaining in the target range,” he continues. “Also by bringing down inflation we are lowering the public’s inflation rate expectations; the public expect inflation to stay low and conduct business on that basis. Having said that, although there has been a significant improvement in inflation in South Africa, it is unlikely that the target range will be lowered yet as there is still some work to be done to maintain control of inflation.”


Plenderleith identifies two requirements necessary for growth. One is the need for stable, responsible macroeconomic policies that keep the budget deficit under control, which is the Treasury’s responsibility. The other is the need to keep inflation within the target range to keep inflation low, which is SARB’s responsibility. “These determine the demand-side of the economy, and our job is to provide the basis for growth in demand that the economy is capable of on a sustainable basis,” he explains. “At the moment, the South African economy is growing at about 4-5% and it is not overheating, therefore it seems that this is what the economy is capable of.”


The other prerequisite for growth is a good economic structure. This is where supply-side policies come into effect, says Plenderleith, pointing out that the government has identified education and the physical infrastructure as critical.

Improving education, training and skills to raise the skills level in the economy, which was dreadfully neglected during the Apartheid years, is imperative, according to Plenderleith. “There is a huge backlog of neglect that needs to be put right and this is slowly happening,” he says.


As far as the physical infrastructure is concerned, Plenderleith says it has been identified as putting a constraint on growth due to the lack of investment during the Apartheid years in the country’s basic infrastructure, such as railways. “Coal, which South Africa has a natural abundance of, is not a very exotic commodity but it is very valuable, and in much demand in China, for example,” he says. “However, problems have occurred when transporting it to harbours for export, as we have a poor railway system that needs upgrading. Therefore a huge amount of work needs to be done to upgrade the physical infrastructure. In fact a programme is being established at the moment.


“I think this is rather exciting,” he adds. “We can now use cutting edge technologies, therefore I am reasonably confident that on both the education and infrastructure goals we will get big investment and we will therefore get higher growth capacity.”


Rand Recovery


The rand has strengthened over the last three years, something that Plenderleith believes partly reflects a recovery from its plunge in 2001; however, he also believes it reflects the general weakening of the dollar over the last year and a half. “The rand’s recovery has, up to a point, been very helpful in bringing down inflation which has meant that SARB can bring down interest rates, which in turn has been helpful to business and the economy,” Plenderleith notes. “It also indicates the level of foreign inward investment into the country that has been driven by better international confidence in South Africa economically and politically.”


There has been a re-rating of South Africa, according to Plenderleith, amongst international investors because of the responsible economic policies they have seen being implemented and the faster growth these policies have produced. It is not all good news, however, for as Plenderleith says, “The recovery in the exchange rate has also put pressure on exporters; however, at the end of the day the exchange rate is determined in the international markets. We have to recognise that that is part and parcel of the dollar going through its adjustments and has nothing directly to do with South Africa, which has a floating exchange rate policy and no exchange rate target.”


Another area that has seen a recovery is the Reserve Bank’s foreign exchange reserves position, which has historically been weak. For instance, in September 1998, SARB had a negative foreign exchange reserves position of US$23 billion. However, with what Plenderleith terms ’a lot of hard work’, by the end of January 2005 the official gross gold and foreign exchange reserves amounted to US$15.1 billion and net reserves to US$11.7 billion. “This will have the effect of dampening rand volatility as well as strengthening SARB’s international credit standing,” he suggests. “And indeed, Moody’s have just raised South Africa’s rating.”




Plenderleith is a big believer in transparency with regards to SARB’s operations and monetary policy intentions. As is the case at most central banks, as soon as a monetary policy decision has been taken, SARB Governor, Tito Mboweni, issues a full statement to the public explaining the Reserve Bank’s thinking. Beyond that, Plenderleith says that the Bank accepts speaking engagements and publishes quite a lot of material. He cites SARB’s quarterly bulletin (which looks at the economy), and its monetary policy review that is released twice a year and gives the SARB’s assessment of the economy and the monetary conditions in it, as well as provides forecasts for inflation looking two years ahead.


“In terms of our market operations, we publish our reserve figures at the end of every month in full so we can communicate what we are doing in the foreign exchange market and we explain changes in the reserves so the market knows what has been happening,” he explains. “However, in our money market operations we publish our actions every day. We operate a very open system in line with best international practice of central banks, not only because it is good practice, but also because it is actually helpful to us that the markets understand what we are trying to do. That makes our operations much more effective.”


Basel II


The Reserve Bank handles bank supervision and regulation, as well as the wider responsibility of the stability of the financial system, and as part of these supervisory responsibilities it has been very involved in the Basel II discussions. “Basel II is being adopted and SARB is working closely with the banks here to help them gear up to the required procedures, controls and assessments,” Plenderleith says. “We are very advanced in South Africa because we have been planning a more risk-based approach for some time. The adoption of Basel II will not involve a huge upheaval in banking or indeed affect bank customers, because banks have been moving towards this type of supervisory arrangement for some time, however, we still need to put the detailed provisions in place.”


Plenderleith explains that the regulatory regime in South Africa is not fundamentally different from other major countries. He points out that the regulatory standards in South Africa are in fact very high. “It is a very advanced and developed system partly because there exists in South Africa a highly developed financial markets sector; much more so than what is normally found in emerging market economies,” he says. “Therefore we have had to have high regulatory standards both for the banking system and the capital markets. For example, the standards of the Johannesburg Securities Exchange are as high as any stock exchange in the world, as is the bond exchange.”


The rand being designated as a CLS Settlement Currency has also helped the development of South Africa’s markets. Plenderleith suggests that being a CLS currency has had little visible impact on the South African market, but notes that, “It was very good news us joining CLS; I was very keen as were my colleagues; we worked very hard with the banks to be geared up for it and I am delighted that we have managed it.


“On the surface it doesn’t change much as the rand is already the most actively internationally traded emerging market currency,” he continues. “But this development is part of the increasing integration of the South African economy into the global economy, which is the major advance in the last 10 years. With the ending of sanctions, we have been reintegrated into the international economy. The fundamental change it has made is below the surface, in that it has tremendously reduced the underlying risk of the mismatch in the timing of settlement, which is precisely what CLS is there to address. It is an important step forward in risk reduction in the world financial system.”


Looking Ahead


South Africa as a whole has changed much in the last 10 years; as has the central bank. “What has changed is not the commitment to responsible monetary policies but the opening up of the economy, which has meant much more active trading, increased capital flows, and more interconnection between our economy and the rest of the world,” Plenderleith says. “This is bound to affect the way the Reserve Bank operates. The other thing that has fundamentally changed is the culture of the organisation, which is absolutely essential in the modern South Africa. We are now an organisation that meets employment equity targets (50/50 black/white and one-third female). It is absolutely essential because we are the nation’s central bank and we have to set an example in the way we staff ourselves and the way we conduct ourselves and the way we relate to the economy.”


So what’s next? SARB faces a number of issues within the South African economy, both domestic and international. It is sticking to its job of keeping inflation down and Plenderleith stresses that the Bank can’t relax on this. It also needs to continue to educate the public about why low inflation is important to create growth, he believes. On the financial stability side, there is also a need to improve the financial arena and make it sounder. Plenderleith also stresses that SARB needs to keep an eye on the movements in the dollar and the increased impact of China on the global economy and make policy adjustments accordingly.


He is also of the opinion that SARB has a serious leadership role to play in the Southern African Development Community region. At the moment it is helping to build the region, which is proceeding well, Plenderleith says, with common work in progress on bank supervision, IT, economic research and statistics, in order to create economically sustainable development.


Overall, the Deputy Governor is optimistic for the future. “South Africa is back on track after the challenges of the last 10 years,” he says. “The exchange rate has recovered from the 2000-2001 crisis, the economy is picking up, and we have steady growth in a low inflation environment. We are also building a strong infrastructure in the country, especially in education, which will raise the skills base of the South African economy and that will enable it to grow faster.”

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