Kganyago: Global economy faces shocks, debt, imbalances

Lesetja Kganyago, Governor of the South African Reserve Bank, identified geopolitical conflict as the most visible and impactful challenge to the global economy.

He noted that central bankers, as technocrats, focus on the economic consequences of war, citing the Ukraine conflict's shock to global food and fuel prices and the renewed Middle East conflict as current examples.

Kganyago emphasized that geopolitical risk is now a more critical factor in the economic outlook than at any point in his career.

For monetary policy, these supply shocks typically drive inflation while suppressing output, making them more complex to manage than demand-side pressures.

While the SARB's policy rate cannot influence global oil prices, its role is to manage expectations.

The goal is to ensure inflation returns to target once the shock has passed, requiring clear communication and potentially timely interest rate adjustments to maintain credibility.

Kganyago identified high and rising sovereign debt as a critical risk, noting developed nations like the United States, with a debt-to-GDP ratio over 120%, now face challenges typically associated with poorer countries.

He highlighted the lack of political will to reduce debt amidst new spending pressures, warning that excessive borrowing undermines fiscal resilience.

He then discussed global imbalances, which have increased since COVID-19 to near 150-year highs, driven primarily by large US deficits and Chinese surpluses.

Kganyago noted the world struggles to manage these divergences, often resorting to costly trade and subsidy wars rather than coordinated macroeconomic rebalancing.

He concluded that multilateralism is threatened, and the appetite to tackle excessive government borrowing is limited.