* Watchdog wants to change SARB's role of protecting rand value
* Conclusions upset financial markets
* South Africans worry about money printing, SARB independence
* Unions, ANC leftists complain about inflation targeting
* Legal analysts say conclusions legally flawed
By Ed Cropley
JOHANNESBURG, June 20 (Reuters) - In eight months as the head of South Africa's anti-graft agency, Busisiwe Mkhwebane, has avoided the limelight, a break from her predecessor whose dogged pursuit of corruption cases against President Jacob Zuma made her a household name.
That changed this week when Mkhwebane, an advocate with 20 years experience, slid a monetary policy bombshell into the findings of an investigation into an apartheid-era bailout of a bank bought by Barclays Africa Group.
At the end of a 56-page summary of the probe the Public Protector launched an attack on the South African Reserve Bank (SARB) and its constitutional obligation to protect the rand, a central pillar of the post-apartheid state.
Specifically, Mkhwebane proposed changing the constitution to remove the phrase "to protect the value of the currency" from the definition of the SARB's primary role.
Instead, it should define the bank's main objective as promoting "balanced and sustainable economic growth... while ensuring that the socio-economic well-being of the citizens are protected", she said.
That set alarm bells ringing for many South Africans concerned that the change could lead to money printing and threaten the SARB's independence. The central bank's inflation targeting has long been derided by leftists from Zuma's ruling ANC party who see a weak currency as an economic panacea.
Former SARB Governor Tito Mboweni was incensed, pointing to political skulduggery ahead of ANC elections in December that will replace Zuma, facing a series of scandals, as party leader. "When we negotiated our sovereign constitution, we entered into a covenant about the independence of the SA Reserve Bank," he wrote in an essay.
"It is unwise to try and change this at the slightest political provocation. It is a very serious matter for our beloved country. Please think carefully about this."
Mboweni, who was also instrumental in smoothing South Africa's return to the global financial system after Nelson Mandela's election in 1994, also lamented the potential damage to Pretoria's image and credibility.
Currency and bond markets reacted sharply to the watchdog's comments, with the rand losing 2 percent in two days and bond yields spiking as ratings agencies warned of further downgrades to South Africa's already crumbling credit profile.
Former finance minister Trevor Manuel, another architect of South Africa's post-apartheid stability, shared Mboweni's concerns.
"This report extends so far beyond the remit of the Public Protector that it portends significant danger," he told Reuters. "What is her locus standi to propose amendments to the constitution? That is so way above her pay grade."
Legal analysts and the SARB denounced her conclusions as legally flawed and beyond her remit of investigating alleged corruption by public officials.
"The Reserve Bank has consulted its legal team and has been advised that the remedial action prescribed by the Public Protector falls outside her powers and is unlawful," it said in a statement.
It would take urgent legal action, it added.
Even the person who brought the initial complaint about the bank bailout, advocate and anti-corruption campaigner Paul Hoffman, was flummoxed.
"It came like a bolt from the blue," he told Reuters.
"It wasn't asked for, it wasn't required and it isn't legal. The complaint had nothing to do with it. The scope of the powers of the Public Protector do not extend to changing the constitution because of what she had for breakfast."
Newspapers were equally perplexed.
"What is Busi doing?" the Johannesburg-based Citizen asked in a front-page headline, while the Sowetan led on the backlash under the headline "Public Protector's directive slammed".
With few other explanations to hand, suspicion has turned to Zuma and finance minister Malusi Gigaba, who some see as a political opportunist who regularly denounces the evils of "white monopoly capital" - shorthand for the disproportionate financial clout of the white minority, a lingering legacy of apartheid.
As a remedy - and with the ruling ANC's popularity falling ahead of 2019 elections - Gigaba and others have been pushing for "radical economic transformation" without saying what it entails.
But on Tuesday, he defended the central bank.
"We need to protect at all times the independence of the South Africa Reserve Bank so we don't subject it to undue influence from anybody," he told Reuters in an interview.
Mkhwebane also defended her integrity in a radio interview on Tuesday but she said the SARB's status as a lender of last resort "has commercial benefits only in respect of the financial sector", and "does not improve the socio-economic conditions of ordinary citizens".
"Once the state takes control of creating money and credit, numerous benefits aimed at alleviating economic ails of ordinary disadvantaged people may be achieved," she added. (Editing by Anna Willard)