Market forces and political realities

On Thursday the South African president, Cyril Ramaphosa, told Parliament that his government is to nationalize the South African Reserve Bank (SARB). He made the point that it was one of the very few central banks to have private shareholders and suggested that his government merely sought to regularize this anomaly.

This explanation might have passed off as credible were it not for the fact that elections are due in South Africa in early May. The ruling African National Congress (ANC) faces threats from the Economic Freedom Fighters (EFF) on the left and from the Democratic Alliance, the main opposition party, on its right. Ramaphosa may be trying to shore up the ANC’s radical credentials while reversing the “state capture” of government institutions under the presidency of his predecessor, Jacob Zuma. It is worth noting that Julius Malema, the head of the EFF, has previously called for SARB nationalization.

While the announcement may make good electoral sense, it does raise questions over the survival of South Africa’s solitary investment-grade credit rating from Moody’s. The downgrade of the rating would have negative implications for the government’s borrowing costs. The doubts arise because ratings agencies tend to reflect the priorities of the markets, and the latter have strong opinions about the independence of central banks.

Perceived meddling by politicians in central banks has undermined investor confidence elsewhere. The resignation of Urjit Patel, the governor of the Reserve Bank of India (RBI), in December 2018 caused some unease. The Indian government did not ask for Patel’s resignation but did push for an easing of banks’ capital requirements and of the RBI’s controls over state-owned banks in poor health. Its agenda has been to boost bank lending and therefore growth.

The markets also have strong feelings about the independence of the judiciary, and reacted when Walter Onnoghen, the chief justice of Nigeria, was suspended shortly before that country’s presidential elections in February. The federal government acted on the basis of Onnoghen’s failure to declare personal assets, which he admitted, as well as allegations of financial impropriety. The opposition argued that the suspension was intended to spike any court challenges to the election outcome. (In fact, Muhammadu Buhari defeated Atiku Abubakar on 23 February by a 15 percentage point share of the national vote, and the loser’s plans to contest the result in court lack credibility.)

Our take is that “market forces” and their allies have to accept sometimes that they do not manage emerging economies, and have to make adjustments for what we will call political realities. An elected South African government has to take some steps unpopular with market forces, such as on land ownership, to defuse frustration with the modest material changes in society since the multi-party democratic elections in 1994.

The nationalization of the SARB sounds chilling but we should remember that the private shareholders have always been a minority and have not influenced monetary, or foreign-exchange policy. Foreign portfolio investors would be justified in running for the door marked exit in the event of a serious attempt to undermine central bank independence. Such a move would be devastating, given their large share of government debt holdings. For now, the said thin end of the wedge may have to be tolerated.

In the Nigerian case, the timing of Onnoghen’s suspension was surely electoral in origin. The official line that the federal government moved on the receipt of a petition from civil society is barely plausible. It did have legitimate grounds for its action so we term the timing another political reality.

There are parallels of sorts in developed economies when voters reject the unimpeded power of market forces and take a stand against globalization. The result of the EU referendum in the UK in June 2016, the election of Donald Trump in November 2016, and the protest of the gilets jaunes in Paris and other French citied in recent months fall within this category.

Margaret Thatcher is said to have told her husband Denis that “you can’t buck the market”. In practice, both governments and voters can restrain market forces.


15 March 2019

Jean Puri