South African Reserve Bank (SARB) Annual Report

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Finance Standing Committee

15 August 2018
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

Government Departments & Entities 2016/17 Annual Reports

The Standing Committee on Finance met with the South African Reserve Bank (SARB) for a briefing on their annual report and related issues.

SARB, in presenting, highlighted the macroeconomic overview and outlook. Global growth is accelerating but risks were also rising. During the second half of 2017 global economic conditions were favourable for South Africa and other emerging markets as growth in advanced economies recovered. However, this was not sustained in the first half of 2018 as expectations of a faster pace of monetary tightening than previously expected began to emerge as the strong US growth was sustained. In addition, the strong dollar effect dominated global markets, which saw a reversal of capital flows from emerging markets. Domestic growth was still too low. Domestic GDP expanded by a moderate 1.3% in 2017 following a post-crisis low of 0.6% in 2016, largely due to a rebound in agriculture and mining. Improving terms of trade and more robust growth of South Africa’s trading partners reduced the current account deficit to 2.5% of GDP in 2017. Domestic consumer price inflation decelerated rapidly throughout 2017, with notable declines in food and electricity prices. 2018 began with positive news of improving investor and consumer confidence as well as a stronger currency. However, this did not translate into strong macroeconomic outcomes. The 2.2% contraction in 2018 Q1 was the largest since the global financial crisis. Mining, manufacturing and agricultural sectors contracted the most. The marked slowdown in growth in real Gross Domestic Expenditure in Q1 2018 was broad-based among various expenditure components.

On the Reserve Bank’s financial performance, a profit of R2 164 million, attributable to the parent, was R962 million higher than the previous year of R1 202 million. Increase in profits was attributed to improved profitability at African Bank (R981 million increase) and the SA Mint due to increased Kruger Rand sales (R122 million increase), offset by reduced profitability at the South African Bank Note Company (R117 million reduction).

SARB cautioned that the recovery in economic activity was expected to be weak and choppy. This was especially because consumer demand slowed again in the second quarter of 2018. While inflation remained within the inflation target, risks are on the upside and included the weakening exchange rate, rising oil prices and increasing electricity prices, and remuneration increases in excess of inflation and productivity. Anchoring inflation expectations at the midpoint of the inflation target range will ensure that inflation remains firmly within the inflation targeting range thus limiting the need for MPC (monetary policy committee) action. Further, fixed investment was not expected to pick up meaningfully in 2018. Weak demand should prevent an acceleration in consumer and capital goods imports, which was expected to contain the current-account deficit during the remainder of 2018.

Members noted the SARB’s economic growth rate forecasts. What made it confident that such growth margins would materialise given the prevailing economic climate? They asked if there was progress in relation to the release of the report on VBS Bank. Reference was made to media reports about a possible takeover of VBS Bank by the legislature. Had this subject been broached to the Reserve Bank? Would such an arrangement be legally tenable? Has the trend of improved consumer confidence been sustained during the current quarter? They asked for views on the redefinition of the Reserve Bank’s mandate. They asked about the rationale of choosing Nedbank to facilitate repayments to VBS deposit holders. Was a proper bidding process followed? They also objected to there being only three black Africans and three female members of the Reserve Bank’s board of directors. This had to be changed to reflect the demographics of the country. Also, when was the Reserve Bank planning to dispose of its stake at African Bank?

The Chairperson noted the concerns about prospects for economic growth. On VBS Bank, the majority believed the bank ought to be saved, but within confines of the law. Those who did wrong must also face the full wrath of the law. Having African-owned companies collapse on the backdrop of efforts to bring about greater transformation within the financial sector was concerning. He pointed out the need for deeper discussions on fintechs before the current term of Parliament ends.

Meeting report

South African Reserve Bank (SARB) presentation 
Mr Lesetja Kganyago, Governor, SARB, took the Committee through a presentation on the Reserve Bank’s annual report and related issues. On macroeconomic overview and outlook, global growth is accelerating but risks were also rising. During the second half of 2017 global economic conditions were favourable for South Africa and other emerging markets as growth in advanced economies recovered. However, this was not sustained in the first half of 2018 as expectations of a faster pace of monetary tightening than previously expected began to emerge as the strong US growth was sustained. In addition, the strong dollar effect dominated global markets, which saw a reversal of capital flows from emerging markets. Prices of most commodity prices declined, while international oil prices continued to increase. Over the past two weeks, emerging markets have experienced a sell off as US sanctions against Turkey and Russia weighed on risk sentiment.

VBS Mutual Bank (VBS) was placed under curatorship with effect from 17:00 on Sunday 11 March 2018.
SizweNtsalubaGobodo was appointed as curator of the bank. The curator indicated that there were inadequate and questionable governance and risk management practices within the bank. A senior advocate was appointed to conduct a forensic investigation into VBS. A decision was taken to repay all retail deposits up to R100 000 per retail depositor. The preliminary findings of the forensic investigation were shared with the DCPI (Hawks).
Recently the High Court issued provisional sequestration orders against five individuals and provisional liquidation order for Vele Investments.

Since 1996, there have been several legislative changes to clarify the role of shareholders, reduce the influence of shareholders, limit the rights of foreign shareholders and reduce concentration through limiting the number of shares that related parties can hold. The board of the SARB plays a role in ensuring good governance, but plays no role in policy or regulatory decisions of the SARB. Government appoints 8 members of the board, including the four executives, while shareholders elect 7 members to the board.

Domestic growth was still too low. Domestic GDP expanded by a moderate 1.3% in 2017 following a post-crisis low of 0.6% in 2016, largely due to a rebound in agriculture and mining. Improving terms of trade and more robust growth of South Africa’s trading partners reduced the current account deficit to 2.5% of GDP in 2017. Domestic consumer price inflation decelerated rapidly throughout 2017, with notable declines in food and electricity prices. 2018 began with positive news of improving investor and consumer confidence as well as a stronger currency. However, this did not translate into strong macroeconomic outcomes. The 2.2% contraction in 2018 Q1 was the largest since the global financial crisis. Mining, manufacturing and agricultural sectors contracted the most. The marked slowdown in growth in real Gross Domestic Expenditure in Q1 2018 was broad-based among various expenditure components.

The South African economy remains vulnerable. The recovery in economic activity is expected to be weak and choppy, especially as consumer demand (a historical driver of upswings) slowed anew in Q2 2018. Fixed investment is also not expected to pick up meaningfully in 2018. Weak demand should prevent an acceleration in consumer and capital goods imports, which is expected to contain the current account deficit during the remainder of 2018. GDP growth is expected to be modest in 2018 and should be much lower than initial expectations. The projected average growth rates of 1.2% for 2018, 1.9% in 2019 and 2% in 2020.

South Africa’s official unemployment rate was 27.2% in Q2 2018, somewhat lower the 27.7% in the same period in the previous year, with growth in nominal unit labour costs continuing to outpace formal non-agricultural labour productivity growth. South Africa’s trade balance switched from a surplus of R74 billion in Q4 2017 to a deficit of R25 billion in Q1 2018, resulting in a significant widening of the deficit on the current account from 2.9% of GDP to 4.8% of GDP over the period. The net inflow of capital on the financial account of the balance of payments increased from R50.3 billion in Q4 2017 to R53.2 billion in Q1 2018. Domestic consumer price inflation slowed further in the first quarter of 2018 to a low of 3.8% in March, before accelerating to 4.6% in June. Core inflation slowed to 4.1% in March 2018 – its lowest rate in six years – before accelerating to 4.5% in April following the VAT increase, subsequently decelerating to 4.2% in June.

Mr Kganyago highlighted the Reserve Bank’s financial performance. Profit of R2 164 million, attributable to the parent, was R962 million higher than the previous year of R1 202 million. Increase in profits was attributed to improved profitability at African Bank (R981 million increase) and the SA Mint due to increased Kruger Rand sales (R122 million increase), offset by reduced profitability at the South African Bank Note Company (R117 million reduction).

The total SARB staff composition is 72% black and 28% white. Top management is 50% black and 50% white.
SARB spent R35 million on training and development, reaching 80% of the workforce.


Discussion
Mr A Lees (DA) noted the economic growth rate forecasts. What made the Reserve Bank confident that such growth margins would materialise given the prevailing economic climate? He asked for comments about the implications of having a central bank whose reputation is in tatters. He asked if there was progress in relation to the release of the report on VBS Bank. He made reference to media reports about a possible takeover of VBS Bank by the Limpopo government. Had this subject been broached to the Reserve Bank? Would such an arrangement be legally tenable? What would be its consequences to depositors and taxpayers?

Ms D Mahlangu (ANC) commented on the weak rand and fuel price increases. What were the Reserve Bank’s plans to mitigate this situation? Making reference to VBS Bank, she asked for assurances that a repeat of a bank collapse would not happen going forward.

Ms P Nkonyeni (ANC) commented on the Reserve Bank’s governance structure. Were private shareholders adding any value to its board of directors in the current conjuncture? What advice would the Reserve Bank offer to government in its efforts to stimulate economic growth? Has the trend of improved consumer confidence been sustained during the current quarter? She asked for views on the redefinition of the Reserve Bank’s mandate.

Mr F Shivambu (EFF) asked about the rationale of choosing Nedbank to facilitate repayments to VBS deposit holders. He wanted to know if a proper bidding process had been followed. He felt Nedbank was chosen to ensure that it makes headway in Vhembe. Were there any plans to handover the operations of VBS Bank to the Limpopo Economic Development Agency? Whatever happens to VBS Bank; it should ultimately be at the hands of black people. He questioned the capacity in which the deputy governor, Mr Kuben Naidoo, had posted a tweet challenging those who were attacking Mr Momoniat to subject themselves to lifestyle audits and asking what his critics had to hide. "We are MPs and we raise issues about African leadership in a parliamentary committee and you think you have some power to attack MPs?” Mr Naidoo must explain what Members were hiding. In what capacity did he make such kind of insinuations and nonsensical allegations? He asked how it was that Mr Naidoo, who had been an incompetent registrar of banks had been appointed CEO of the financial sector Prudential Authority. He wanted to know what process was followed in making the appointment, or was it just a recycling of incompetence and the same mob of people who were trying to protect each other’s interests. Were other people allowed to apply for the post and was due process followed? He also objected to there being only three black Africans and three female members of the Reserve Bank’s board of directors. This had to be changed to reflect the demographics of the country. Also, when was the Reserve Bank planning to dispose of its stake at African Bank?

The Chairperson noted the concerns about prospects for economic growth. On VBS Bank, the majority believed the bank ought to be saved, but within confines of the law. Those who did wrong must also face the full wrath of the law. Having African-owned companies collapse on the backdrop of efforts to bring about greater transformation within the financial sector was concerning. He pointed out the need for deeper discussions on fintechs before the current term of Parliament ends.

Mr Kganyago said the Reserve Bank was making efforts to ensure that personnel composition is reflective of the country’s demographics. There was a clear commitment that the board vacancies, following the departure of two female board members representing government, would be filled by women. He gave the assurance that due process had been followed in appointing Mr Naidoo to the Prudential Authority. The appointment was conducted in consultation with the Minister of Finance, in compliance with the law. Further, the Reserve Bank was not in breach of any law by holding a stake at African Bank. However, the agreement was that the stake would be sold down proportionately, and the selloff should be broad-based and preferable. On having VBS Bank under the control of Limpopo provincial government, he noted that the one bank, owned by a provincial government- Ithala Bank, owned by the KwaZulu-Natal provincial government- was a legacy issue and should not be replicated. On the other hand, the Reserve Bank fully supported the idea that VBS Bank remain in black hands should it eventually be sold. However, prospective buyers should wait until its accounts had been finalised because, as yet, there was no indication of the extent of the "hole" and people needed to know what they were buying. Notably, regulators could not stop banks from failing; they could only stop the failing banks from disrupting the entire financial system. He emphasised that the debate about redefining the mandate of the Reserve Bank should not undermine its independence and credibility. Nationalisation would be a protracted and expensive process and independence is needed to retain control over monetary policy. Preserving the independence, integrity and credibility of the Reserve Bank was crucial.

Mr Kganyago cautioned that the recovery in economic activity was expected to be weak and choppy. This was especially because consumer demand slowed again in the second quarter of 2018. While inflation remained within the inflation target, risks are on the upside and included the weakening exchange rate, rising oil prices and increasing electricity prices, and remuneration increases in excess of inflation and productivity. Anchoring inflation expectations at the midpoint of the inflation target range will ensure that inflation remains firmly within the inflation targeting range thus limiting the need for MPC (monetary policy committee) action. Further, fixed investment was not expected to pick up meaningfully in 2018. Weak demand should prevent an acceleration in consumer and capital goods imports, which was expected to contain the current-account deficit during the remainder of 2018.

Mr Naidoo shared what he believed was the most salient lesson learnt from the VBS Bank matter. The Reserve Bank overly relied on the audited financial statements of VBS. He explained that banks are expected to submit returns to the Reserve Bank, sometimes on a monthly or a quarterly basis. These returns must be signed off by the bank’s senior management, the CEO and auditors. It was quite obvious in hindsight that the data that was submitted on a monthly basis or a quarterly basis by VBS was not accurate, even though the auditors approved it. That is why the Reserve Bank was not able to pierce that veil because auditors were part of that conspiracy. This shows that other ways to verify financial statements must be explored, not only for small institutions but all banks. It is a serious offence for banks to submit untrue data to the Reserve Bank. Banks could lose their licence or be imposed a significant fine. If any bank giving the Reserve Bank data on a monthly basis or quarterly basis – whether those are audited or not – if that information is not accurate; it is an incredibly serious violation.

Mr Naidoo explained why Nedbank was chosen to facilitate repayments to VBS deposit holders. The welfare of the depositors and the speed of execution was important. The Reserve Bank, on the basis of recommendations from the curator, looked at banks offering similar products and their cost structure. It was decided to choose the bank with those products at the lowest fees. The report outlining the process followed to engage Nedbank could be availed to the Committee, if need be. Also, the VBS forensic report was expected to be finalised by end of August and would be made public.

The Chairperson said Members should derive pride at the performance of the Reserve Bank thus far. The Reserve Bank was one of the best performing institutions in the country. He commented on Mr Shivambu’s concerns in relation to the engagement of Nedbank to facilitate repayments to VBS deposit holders. At this stage, there was no evidence of impropriety in the decision, and therefore the Committee would not be in a position to make any resolution. The Committee would await the report on same, to satisfy itself before making any determinations. He wished the Reserve Bank delegation well.

The meeting was adjourned.

 

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