Kganyago warns of global shocks, highlights emerging market resilience

SARB Governor Lesetja Kganyago highlighted geopolitical conflict as a primary driver of global economic shocks, noting its increased importance in the current outlook.

He explained that renewed conflicts, following the war in Ukraine, continue to impact global food and fuel prices, leading to inflation while suppressing output.

Kganyago emphasized that while central banks cannot prevent these supply shocks, they must manage expectations to ensure inflation returns to target once the shock passes, potentially requiring timely interest rate adjustments.

The second major risk factor identified was high and rising sovereign debt levels, now a concern for developed countries like the United States, where the debt-to-GDP ratio exceeds 120 percent.

Excessive government borrowing diverts resources to interest costs, crowds out private sector activity, and depletes fiscal capacity.

He contrasted this with South Africa's determined fiscal adjustment post-global financial crisis, which has restored market confidence.

Kganyago also addressed global imbalances, noting their increase since COVID-19, with the US running large deficits and China large surpluses.

He highlighted the difficulty in resolving these, especially when powerful economies are involved, and stressed the need for coordinated macroeconomic rebalancing.

However, multilateralism is threatened by fragmentation, making such coordination challenging.

A final concern was financial market risks, despite major asset markets appearing indifferent.

Kganyago pointed to the US$2.5 trillion private credit market with limited transparency and liquidity.

He also noted the extreme valuations of AI companies, which are pricing in a best-case scenario unlikely to materialize, warning that gravity could re-assert itself, leading to stock price declines.