Citigroup Index Inclusion to Fuel Rand Swings, Kganyago Says

Reserve Bank Deputy Governor Lesetja Kganyago
Elias Lesetja Kganyago, deputy governor of the South African Reserve Bank, Photographer: Daniel Acker/Bloomberg

The inclusion of South African debt in Citigroup Inc.’s World Government Bond Index will contribute to the rand remaining the world’s most volatile currency, Reserve Bank Deputy Governor Lesetja Kganyago said.

Entry into Citigroup’s gauge in October may have accelerated the currency’s 8.4 percent depreciation against the dollar this year as slowing global growth, lower commodity prices and labor strikes curbed appetite for local assets, Kganyago said yesterday in an interview in Pretoria.

“The currency is going to remain pretty volatile,” Kganyago, 47, said. For investors who started buying South African debt because it was being included in the Citigroup index “the problem is that they didn’t seem to be very familiar with the story of an environment of investing in a bond market where the currency plays such a big factor.”

The rand has slumped since Aug. 10, weakening below 9 to the dollar for the first time since April 2009, as the worst mining strikes since the end of apartheid disrupted output, prompting downgrades by Moody’s Investors Service and Standard & Poor’s. The rand’s three-month implied volatility, which shows traders’ expectations of the rand’s movements during that period, is the highest of 16 major currencies tracked by Bloomberg.

Inflation Pressure

The rand strengthened 0.6 percent to 8.8092 per dollar as of 3:28 p.m. in Johannesburg. The yield on the government’s 10.5 percent debt due December 2026 fell four basis points to 7.58 percent.

“Unless these investors are really familiar with the story and understand the interplay between the currency and the bond market in the South African context, we are going to have that kind of volatility with us for some time,” Kganyago said.

The currency’s decline is adding to pressure on inflation, threatening the central bank’s 3 percent to 6 percent target range and limiting policy makers’ ability to reduce interest rates to bolster the economy. The Monetary Policy Committee, which surprised economists by lowering the benchmark rate by half a percentage point in July, left it unchanged at 5 percent last week.

While inflation accelerated to 5.6 percent in October, it’s being fueled by “cost-push” factors including higher oil prices, with little evidence of price pressures spreading in the economy, Kganyago said.

Flexible Targets

“We are flexible inflation targeters,” he said. “For as long as we think that inflation is driven by once-off factors and we don’t see any evidence of second-round effects as reflected by the fact that the core measure is still remaining benign, we don’t get overly concerned.” That “gives monetary policy the room to continue to be accommodative,” he said.

The MPC estimates inflation will probably peak at 5.7 percent in the first quarter. That projection doesn’t take into account revisions to the consumer-price basket by the statistics agency next year that may boost the inflation rate by 0.2 percentage points, Kganyago said.

Inflation is accelerating at a time when growth in Africa’s biggest economy is slowing, restricting policy makers’ options. The central bank lowered its growth forecast for this year to 2.5 percent, which would be the slowest pace since a 2009 recession.

“Are we facing stagflation?,” Kganyago asked. “Not yet, but I think it remains a risk to the outlook.”

President Jacob Zuma appointed Kganyago as deputy central bank governor in March 2011. Before that, he served as director general of the National Treasury, the highest civil-servant position at the ministry, from 2004. During his tenure, South Africa posted its first budget surplus since the 1960s.

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