By Oonagh Leighton
Tito Mboweni, governor of the South African Reserve Bank is in an ebullient mood. As Emerging Markets asks him about parallels between his favourite hobby, fly fishing, and managing the central bank, Mboweni's trademark rumble of laughter fills the room. ?My kids would say that they are both boring, but I would have to say both involve a great deal of patience and skill,? he says. ?The further you cast your line and the more patience you have the greater the likelihood that you will catch a trout.?
Metaphorically speaking, Mboweni has been catching a lot of trout over the past 12 months.
Testimony to this came on June 14 when the Reserve Bank successfully executed a $1 billion three-year loan facility. The issue was both oversubscribed and competitively priced.
?This is not the first time our deals have achieved this and shows, I think, a general appetite for the South African credit,? says Mboweni. ?Pricing I think reflects the reassessment of the South African credit by the market. The pricing we achieved, 47.5bp per annum above Libor/ Euribor, represents a fairly significant reduction in funding costs.? Last year, for example, a comparable loan by the Reserve Bank was priced at Libor +67.5bp.
Many factors have contributed to the improvement of South Africa's credit rating. ?Above all, in the past 10 years this country has established itself as a place where the rule of law is respected,? says Mboweni. ?We have a judiciary that works.?
His prudent monetary policy has helped improve South Africa's image with international investors. ?We have established a credible monetary policy framework with a reasonably acceptable inflation range,? he says.
The Reserve Bank, like many other central banks, has adopted an inflation targeting strategy. The target range is between 3% and 6%. ?Inflation targeting has allowed us to explain in much simpler and clearer terms what we are doing about price stability. As such it has helped the Reserve Bank to become more transparent,? says Mboweni.
However, increasingly high oil prices are giving rise to inflationary pressures, and Mboweni recognizes the need to keep a cool head. ?All central banks must be extremely concerned about the oil prices right now. It is a crazy situation ? almost like a casino out there.?
He warns of the need for rationality: ?If the market doubts the supply capability of Opec then we are in trouble. But the oil price has to come down.?
Mboweni emphasizes how his hands are tied in such a hostile external environment. ?Our fairly robust exchange rate has helped to cushion-off some of the effects, but it is difficult. In South Africa we have an understanding in our framework that takes into account external shocks. In this case we will be careful to explain inflationary pressures to the public. In any case, tightening monetary policy does not reduce the oil price.?
In the meantime Mboweni stays alert for signs of the secondary effects of inflation. ?When we begin to see the possibility of second round effects then monetary policy must react.?
He remains confident that the Reserve Bank will not breach its 2004 and 2005 inflation targets, though he adds as a caveat: ?When factors change then, as John Maynard Keynes himself said, one will change one's mind.?
Progress has also been made on the fiscal front. ?Tremendous progress has been made since 1994 on the fiscal side,? says Mboweni. ?Fiscal management has been exemplary, and we have seen the deficit before borrowing fall from a high of over 7% [of GDP] to under 3%.?
He says that this has been accompanied by significant fiscal consolidation. ?Before 1994 we had so many fiscal authorities, the central government and the homelands. We now have a single budget system for South Africa. This has been an important factor.?
Mboweni has also helped turn around the bank's foreign exchange reserve position, although it is still meagre. ?We have been gradually and responsibly building our reserve position. In 1998 we had a negative position of $23 billion. Gross gold and other FX reserves now stand at just about $12 billion.?
With South Africa enjoying 18 successive quarters of growth, the economy looks well placed to continue performing well. The forecast for 2004 is just over 3%.
?All news seems to favour a continuing high rate of growth,? says Mboweni. ?Manufacturing industry is out of recession and mining is growing rapidly. The demand for metals has rocketed.