Phala Phala Matter, South African Reserve Bank & Prudential Authority 2021/22 Annual Reports

Meeting report

Reserve Bank questioned on Phala Phala issue

Mr F Shivambu (EFF) said he was under the impression that before the South African Reserve Bank (SARB) made its presentation, the Committee would adopt the agenda to raise the issue the EFF had raised in the letter written to the SARB on 28 June, asking specific questions about prima facie evidence that had been produced on Phala Phala Game Farm issue. It had asked the SARB to confirm or deny if they had ever interacted with the declarations by the sitting President about the millions of US dollars that were stored at the farm. Also, as the institution responsible for foreign currency regulation, what had happened? The SARB had not responded to these questions, yet their constitutional obligation was to account to Parliament and the people of South Africa.

He was of the belief that the SARB should not be permitted to present to the Committee until they answered the questions. They should account to the Committee and answer the questions, unless it was the case that they too were part of the crimes of this country. The EFF had written several letters to the SARB asking for engagements with them, some of which had even said they would take the SARB to court, yet they still had not had engagement sessions with the Bank, and they had not received any answers from them. "Could we be given an answer before we 'klap' them for stealing people's money?"

The Chairperson asked Mr Lesetja Kganyago, Governor of the South African Reserve Bank, whether the SARB's presentation would cover this or whether the SARB had a different manner of responding to Mr Shivambu's request.

Mr Kganyago said that the issues raised by Mr Shivambu were not covered in the presentation. The SARB had understood that they would be presenting their annual report. He added that the SARB had responded to the letter from the EFF and other political parties, and its response had been the same. Once there was any report about any possible foreign exchange control violations, it was practice for the SARB to engage with the parties involved and then not comment publicly on the investigations into violations to not undermine them. The SARB was working with law enforcement agencies on this matter and it would not serve any good to get into the details of the issue.

Mr Shivambu said he believed that the Governor of the Reserve Bank was taking the Committee Members for granted, and was reducing Parliament to some media request for comment. The EFF was not asking for a comment -- it was asking for accountability from an institution that must enforce foreign currency resolutions. Committee Members were elected officials, not a media house. They were asking him to account before he made his presentation.

The Chairperson asked Mr Shivambu whether he had received the response from Mr Kganyago.

Mr Shivambu replied that the letter from the Reserve Bank stated that the SARB had no comment. That was a refusal to respond to the specific questions they had been given. What kind of nonsense was treating parliamentary procedures as though they were media procedures? It was constitutionally enshrined that all these institutions had to account to Parliament. An institution stating that they did not have a comment was not accountability. If permitted, it meant that in all instances where Members of Parliament wished to hold officials and institutions accountable, they would be told "no comment". Where was this legally permitted? There was no reason whatsoever that the Reserve Bank could not confirm or deny if it was investigating the Phala Phala Game Farm matter, seeing it was a matter of public interest.

The Chairperson noted Mr Shivambu's statements, and opened the floor for other Members to share their comments.

Dr D George (DA) confirmed that the Democratic Alliance had also written to the SARB regarding the issue that Mr Shivambu had raised, and had received a reply. They were mindful that there were several processes in a complex matter. They had received the response from the SARB with thanks. They were of the view that other matters affecting monetary policy must be attended to in this meeting, and would prefer that the meeting continue with its business and not get side-tracked by the matter raised by Mr Shivambu.

Ms P Abraham (ANC) said that Mr Shivambu's point was of interest to the entire Committee. The Committee had an interest in the SARB's response. She was of the opinion that the Committee needed to organise a special urgent meeting on this matter as the only agenda item so that they could engage with it vigorously. The matter was not part of their presentation for the day. As much as the Committee was looking for answers, they were also not looking for half-baked answers. The SARB needed to be given an opportunity to prepare satisfactory responses. If the Committee was not satisfied with the responses, they could then take the SARB to task because they had received enough time and an agenda.

Mr I Morolong (ANC) said he agreed with Ms Abraham that a specific meeting needed to be held to deal with the issue Mr Shivambu raised for the responses to be properly processed, and for the matters to be fleshed out.

The Chairperson believed that Ms Abraham and Mr Morolong's suggestions came with a middle ground to accommodate Mr Shivambu's request.

Mr Shivambu was still of the belief that there had not been a balanced and sound reason why the SARB had not responded to the political parties' questions. This issue was not before a court of law, and the SARB was therefore obliged to respond. The matter at hand was not complex, and the SARB could give a simple answer -- unless they were trying to cover up information that should be accounted for. The SARB was meant to account months ago.

The Chairperson told the SARB's delegation that the Committee recommended that they come back to the Committee with responses at a later stage. The Committee's support team would follow up with the SARB. He asked the Committee whether the meeting could proceed with that understanding.

Mr Shivambu interjected to ask the SARB to indicate when they were going to go into their records of institutions who recorded the bringing of money into the country, and to tell the Committee whether the sitting President had brought its attention to the foreign currency that had been brought into the country or not. This information was not personal information. The SARB had a constitutional obligation to tell the Committee whether there had been a declaration or not.

The Chairperson clarified to Mr Shivambu that the resolution was that the SARB would attend to all the issues raised in the letter, and then indicate to the Committee when they would return to address the issues. The SARB knew how they were supposed to account, and they would be in the best position to respond to the issues when they were given a specific day on which to do so.

Reserve Bank's annual report 2021/22

Mr Kganyago took the Committee through the SARB's annual report.

On the macroeconomic overview and outlook, he reported that inflation was on the rise and was eroding the income of working people. More forceful monetary policy tightening was being done. Due to the KZN floods and load-shedding, domestic growth would slow sharply in the near term. Inflation was rising in the United States (US) and the United Kingdom (UK), and was expected to peak later this year. All the advanced economies were expected to be outside of their targets. With that expectation, there were concerns that inflation expectations could be de-anchored, and one would see a global public that was increasingly intolerant to inflation. This had been seen in many parts of the world, with people complaining about rising inflation and the central banks acting to curb the ravages of inflation. They expected to see a decline in 2023, should they be successful.

In emerging markets, it was expected that inflation would begin to slow down in the new year. South Africa was expected to average 6.5% this year. As inflation rates rose higher, interest rates went higher too, and the countries with low inflation were able to maintain their policy rates lower for longer. Both advanced economies and emerging markets were tightening their monetary policies.

Referring to commodity prices, he said that the economies that were in trouble were the economies that had high fiscal deficits and high current account deficits. That put them into a twin deficit problem. South Africa was in that space, but was in a better position than the other countries in a similar situation. The SARB should not rest on their laurels, as they needed to be vigilant and ensure that their policies were consistent with the stage of the economy.

The SA yield curve had risen since the last Monetary Policy Committee (MPC) meeting, and had also risen relative to a year ago. This meant that the government would be paying more for borrowing.

Mr Kuben Naidoo, Deputy Governor and Chief Executive Officer of the Prudential Authority, reported on the country's gross domestic product (GDP) growth, stating that quarter two's GDP was expected to contract. This was due to the mining strike, the increased intensity of load-shedding, the floods the country had experienced, and the subsequent consequences of the floods. The potential GDP was still weak. While nominal GDP had reached pre-COVID levels, the structure of the economy had not changed, as there was still a weak GDP growth of less than 1%.

Business confidence was still weak for several reasons. What was clear in the long term was that business confidence was the key driver of gross fixed capital formation. While it had recovered since COVID, it had been on a fairly long downward trend for eight to ten years. It had gone up in the last year, but not sustainably enough to break the long downward trend.

He reported that corporate savings continued to drive national savings. On balance, there was a positive current account balance. However, it was likely that the country would revert to a current account deficit going forward, increasing the vulnerability, given its low savings rate.

Consumers were under strain for several reasons, including issues related to COVID, high food prices, and high fuel prices.

Rising core inflation was pulled up by sharply higher core goods inflation, with services in tow. The South African food inflation data showed an increase in food and fuel inflation, and then core inflation got pulled up later. This often led to people asking why interest rates were hiked if this was an exogenous shock of food and fuel inflation. The answer was that they were not too worried about rising food and fuel inflation -- they know that this was exogenously and cyclically driven, but they do try to prevent it from becoming broad-based. They had seen core inflation going up. It was their job to worry about the broadening of the base of inflation, and that was why the central bank had acted boldly to try and minimise the effect of second round effects.

The nominal repo rate had moved lower as inflation fell, and was now rising in response to rising inflation. Interest rates were still relatively low and relatively supportive of the overall economic recovery.

Mr Kganyago took over to discuss financial stability. South Africa's financial system had remained resilient during the period under review, with no systemic events recorded. Some of the main risks to financial stability that emerged during the year included the continued impact of COVID-19, the effect of rising inflation and interest rates globally on the domestic financial system, the July 2021 unrest, and the high level of government debt. Regarding the last factor, he said the domestics had stepped in as the foreigners had pulled out. The domestic financial sector had continued to pile on government debt as government was trying to fund the deficit. That was an issue, because it led to concentration, but it also meant that the financial sector could quit lending to the private sector and instead had been lending to government.

Mr Kganyago said the SARB had an important role in adapting to and mitigating climate change risks. Its immediate task was to improve information flows within financial markets so that climate change considerations informed investment decisions and maintained financial and price stability.

Reporting on progress against strategic areas, he said that in strategic focus area one (SFA1), inflation had remained within the target range during the period under review. The subsequent events after the financial year ended showed that inflation had bounced above the target. The SARB believed that the average for this year would be 6.5%, and they would be back within the inflation target range next year. However, there were still risks on the horizon.

Regarding SFA4, the SARB had improved its monitoring of external vulnerabilities, given the significant impact of COVID-19. It was developing and implementing various tools to improve the policy toolkit and enhance the functioning of the financial system. Gross foreign exchange reserves had risen to US$58.2 billion as of March 2022, from US$53.0 billion in March 2021. This had built a cushion for the Bank, and as the global financial conditions were tightening, and they were expecting a re-pricing of financial assets globally, there was an expectation of capital outflows from emerging markets towards the advanced economies, so that cushion was needed in reserve to absorb that shock should it materialise.

The SARB's corporate social investment (CSI) initiatives included an initiative focused on education. The programme worked to expand the understanding of monetary policy at the high school level, develop human capital in the fields of monetary policy, enhance economic and financial journalism, support students with funding, and provide support to special needs schools.

Human resources highlights included the Bank's total staff composition being 81% black (African, Coloured and Indian) and 19% white, with executive management being 86% black and 14% white. Female representation in top management had increased from 39% in 2020/21 to 43% in 2021/22, and had also increased in senior management from 47% in 2020/21 to 51% in 2021/22.

Highlights from Prudential Authority annual report

Mr Kganyago said the International Monetary Fund (IMF) and the World Bank had conducted a financial sector assessment programme (FSAP) on South Africa during 2020/21. The FSAP had highlighted that the financial system had thus far weathered the shock of COVID-19. Banks and insurers appeared well-capitalised and liquid. The financial sector oversight was strong, reflecting a commitment to independent supervision and the implementation of international standards. He said an international assessment had been done which had reached this conclusion, and it filled the SARB with pride that such high standards of performance had been reported on.

Implementing the financial action task force mutual evaluation (ME) was quite topical, the failure of which could lead to South Africa being grey-listed. The ME report had given an adverse rating for technical compliance and effectiveness, and had made several recommendations. The Prudential Authority (PA) was confident that in the areas for which it was responsible, it would be able to demonstrate significant progress and compliance by the end of this year. However, the process to avoid grey-listing was more than what the PA was doing. It involved the law enforcement authorities and the prosecuting authorities.

See presentations for full detail

Discussion

Dr George raised concern over the external vulnerabilities of the economy and the difficulties SA was facing in managing money laundering. These issues had serious consequences, should the country be grey-listed. He asked whether the SARB had considered what the implications were going to be and how one could possibly mitigate them in the event the country got grey-listed. Hope was not a strategy -- they needed to be prepared in case something of that sort did happen.

He asked about the nationalisation of the Bank. He recognised that the matter had been around for a long time now, and his party's stance was that the Bank should not be nationalised. Was the Bank considering nationalisation as a potential risk to its independence, or what was it doing, seeing that that sort of environment was looming?

The Chairperson raised concerns regarding the challenges UBank and the Ithala bank faced. He did not think the current leadership could afford to see another small bank collapse again, as the VBS Bank had done. The collapse of VBS was a sad story. The collapse of small banks caused pain to their clients. There was a strong team under SFA3 in the presentation that dealt with the monitoring and evaluation of financial institutions. Was support provided for these small banks? It should not end with monitoring and evaluating and the banks being left to their demise should they collapse. The participation of black people in the mainstream financial sector was this government's objective. As of now, the majority of the banks and insurance companies were white-owned, with a few black people on their boards. The transformation of the financial sector was worrying. He requested that either Mr Kganyago or Mr Naidoo comment on what they were doing to ensure that U Bank and Ithala did not collapse. The Committee would have to meet with these banks at some point.

SARB's response

Mr Kganyago replied on the external vulnerabilities of the economy by stating that the external vulnerability was a moving thing, so one never knows where "the black swan" would come from. The Bank knew that the country's small economy was vulnerable, and the impact of capital flows inwards and outwards would mean for the exchange rate and inflation. Therefore, in that context, one considered what could be done to mitigate those risks. When those risks materialised, they also tended to manifest themselves in the financial sector, which posed a threat to the economy. The Bank's response and risk mitigation ensured that the country's financial institutions and systems were resilient. This was constantly monitored. The system was often subjected to stress testing, and the Bank found that the system would be able to withstand stress. Two independent institutions reviewed the stress testing that the SARB conducted, and found it to be consistent with best practice on how to stress a financial system and test its resilience.

The second component was those shocks could actually lead to depreciation of the exchange rate. The depreciation was normally seen through, and the Bank waited for the second round effects. They would have to respond if the second round effects materialise and inflation begins to rise. As part of the mitigation, they started focusing on getting a degree of freedom should there be a shock. They started focusing on the midpoint of the inflation target range of 4.5% so that there was wiggle room should a shock materialise. The shock did not materialise in the form of COVID-19. The fact that inflation was kept low and close to 4.5% meant that the Bank could utilise its primary tool -- the policy rate -- to smooth the shock and cushion South African households against it. They could deploy the tools they had put in place to mitigate risks, per the SARB's mandate.

Regarding the Financial Action Task Force (FATF), he said that Dr George was correct in saying that hope was not a strategy. The SARB set a mechanism in motion to implement the recommendations applicable to the SARB and the Prudential Authority. They could not vouch for the others, but they needed to treat this with urgency and demonstrate significant progress so that they could actually prevent grey-listing or come out of the grey-listing in 12 months, should the listing happen. The Bank's concern was not only that the FATF would impose the listing on them, but other jurisdictions who treated the FATF requirements as a minimum, would step up their actions on South African-based institutions. This would mean that South African borrowers and financial institutions would be subjected to enhanced due diligence by the international financial institutions. The enhanced due diligence would lead to those entities assessing and asking whether it was worth it to lend to South Africa. It would subsequently increase the cost to borrow for South African institutions, or they would not avail resources at all. The result of this was a barrier to access to capital.

This had massive implications for borrowing in this economy. The country's risk premium had gone up. The market must be pricing this in. Those who did not think that the grey-listing would take place would, if the grey listing took place, increase the premium that they ask of South Africa. This would have economic implications through access to international capital and the cost of accessing international capital. It was important that South Africans prioritise this and treat it with the seriousness it deserved. He would prefer that changes were made before the January meeting, so that the changes could be reported when the January meeting came. Grey-listing could either be avoided or recovered from speedily.

The Bank had said everything it needed to say about the nationalisation of the SARB. The independence of the SARB was enshrined in the Constitution. If the nationalisation of the SARB ended up impeding its independence, they would have to take appropriate measures within the Constitution and the law to safeguard its independence. They had asked the Minister of Finance to deal with these issues. However, as a central bank, they had said everything that they needed to say.

Mr Kganyago responded to the Chairperson's questions on African banks by stating that they were always reluctant to discuss individual financial institutions, because it was unfair to discuss them while those institutions were not present in the meeting. He spoke in general, stating that the SARB's primary responsibility was to the institution's depositors. During the sad collapse of VBS, the SARB's immediate priority was to protect the depositors. As supervisors and regulators, they regulated the deposit-checking activities of these institutions. They did not have a regulatory strategy that stated that the SARB had to prevent banks from failing, because they did not have the ability to prevent the failure. The SARB had to ensure that should the banks fail; they did not take the depositors' assets with them, or take the system down with them. He could not speak about U Bank and Ithala, because they were both under regulatory action at the moment. There was a resolution of U Bank at the moment, and no depositors would lose their money. He did not wish to take the U Bank matter any further than that. Ithala would also require capital. Conversations were occurring between the Bank's supervisors, Ithala and the Kwa-Zulu Natal provincial government. He preferred not to discuss the matter further so that the conversation between the aforementioned stakeholders could continue and the depositors' interests would be protected.

Regarding the support the SARB provides, he replied that they license, supervise, and control entry and exit. When one started an institution, one had to ensure enough capital was brought into the business. The SARB could not provide additional capital, which was not what it did. However, gaps would be pointed out during the supervisory period, and it would ask that these gaps be remedied by management and stakeholders. The Bank would ask them to give them a plan and assess whether the plan was credible. It often happened that the institutions did not have the capital and would have to tell an institution to return to their shareholders to raise it. The configuration was different when it came to cooperative financial institutions, because the Cooperative Banks Development Agency assisted these cooperatives as they developed, so that by the time the SARB supervised them, the development path had been followed through. The SARB was not the most ideal institution to provide support beyond showing these institutions their gaps and asking them to create a plan.

On the participation of black people in the financial sector, he replied that the Financial Sector Regulation Act (FSRA) states that issues relating to transformation in the sector must be dealt with. As part of the supervisory process, each institution does tell the SARB what the transformation agenda needs, and the SARB follows up with them on how far they were progressing with the execution of the transformation agenda. A report has been released by the Financial Sector Charter Council and the Banking Association of South Africa. The data from both reports differ, and it might benefit this Committee to have the financial sector council and the sector present to it so that it could have a more meaningful engagement on the transformation of the sector, using the data produced by these institutions. The SARB monitored transformation to the extent that the institutions had to have a plan and report on how well they were doing with the execution of that plan.

Mr Kganyago opened the platform for more members of the SARB delegation to answer questions.

Mr Naidoo said that the FSRA states that the mandate of the prudential authority was primarily safety and soundness. It also had to consider issues of transformation, competition and financial inclusion. The annual report does state how the SARB accounts for all of these mandates. The Prudential Authority worked with other agencies to try to promote financial inclusion, the integrity of the system, competition and transformation.

Ms Fundi Tshazibana, Deputy Governor of the South African Reserve Bank, made additional comments about regulatory action. She said that regulatory action was not taken lightly. Extensive interaction would have taken place with the institutions involved by the time the SARB took regulatory action. It was important to remember that regulatory action was not the first step it took.

The Chairperson thanked the SARB's delegation and requested a meeting with UBank and Ithala. This Committee had a responsibility to conduct oversight of the financial sector. He asked the Committee's support team to communicate with the management of UBank, Ithala bank, the National Economic Development and Labour Council (NEDLAC), the National Union of Mineworkers (NUM), and the Member of the Executive Council (MEC) responsible for Ithala bank in KZN, to appear before this Committee and brief it on what was happening. The challenges faced by these banks were challenges faced by the people who had elected the Members into Parliament, so their challenges had to be attended to.

The meeting was adjourned.