Mr Stals' statement on South Africa as an emerging market  (Central Bank Articles and Speeches, 29 Mar 1999)
Central bank: sarb | Type: speech | Date: 1999-03-29

## Mr Stals' statement on South Africa as an emerging marketStatement by the Govenor of the South African Reserve Bank, Mr Chris Stals, at the Dinner of Ethos Private Equity in Stellenbosch on 29 March 1999.

## The emerging financial markets of South AfricaSouth Africa is well-known in the international financial community for the sophistica financial markets.

Founded on a good legal and accounting infrastructure, on a long expe more than one hundred years which started with the need for the financing of the early g of the Witwatersrand, on a good education system, and on transparent and universally re macroeconomic fiscal and monetary policies, the country is well placed to be one of th albeit of the second league of world financial market structures, i.e. after the more es super-financial markets of the major industrial countries.For some years, the development of the South African financial markets was shackled constraints of the socio-political problems of the country.

In the economic field, th measures of boycotts, sanctions, disinvestment campaigns and isolation placed severe re on the development of the South African financial markets.

The socio-political reform early 1990's removed most of these constraints, and new challenges have emerged since 1 reintroduce the South African financial markets into the global system, just at a tim global

system

underwent

one

of

the

most

revolutionary

changes

in

its

total

history, which has become known as 'the globalisation of financial markets'.South Africans took up these challenges with enthusiasm and the results achieved with restoring normal relations with the international markets and, secondly, adapting to changes in the global system are often underrated.

Progress made in the South African ma perhaps,

best

illustrated

by

the

almost

explosive

increases

in

turnovers

in

the

majo markets:- Secondary

trading

in

shares

on

the

Johannesburg

Stock

Exchange

increased,

in

ter number of shares traded, from 5.1 billion in 1995 to 9 billion in 1996, 17.9 billion 34.4 billion in 1998.

The total value of shares traded increased from R63 billion R117 billion in 1996, R207 billion in 1997 and R319 billion in 1998.- The increase in total turnover in the secondary market for bonds was equally spectac total

value

of

transactions

in

secondary

trading

on

the

Bond

Exchange

of

South increased from just over R2 trillion in 1995 to R4.3 trillion in 1997 and to R8.5 1998.- Activity in the market for derivatives likewise increased quite significantly over t years.

The number of contracts traded in both futures and options on futures transact than doubled from 1995 to 1998.- The South African market in foreign exchange made its contribution to the developm the overall financial markets.

The average daily turnover in this market increased $2.7 billion in 1995 to $8.0 billion in 1998.

At one stage, in the middle of 1998, daily amount exceeded $10 billion.These developments in the South African financial markets obviously dictated major cha the official policy approach and in regulatory requirements for the various financial The 'big bang' changes introduced by the Johannesburg Stock Exchange, the changes intro by the Department of Finance in the primary marketing of government bonds, the switch fixed bank rate to a fluctuating rate for repurchase transactions by the Reserve Banupgrading of the national payment, clearing and settlement system are just a few examples of flexibility in official policy that supported the developments of the past few years.The expansion of total activity in the financial markets for obvious reasons also attracte foreign participation.

A great number of foreign banking institutions, for example, estab themselves in South Africa.

At this stage, almost thirty foreign banks now operate in the African market through branches or subsidiaries established here, and more than sixty for banks have established representative offices in South Africa.

Foreign investors have taken participation in a number of the member stockbroking firms of the Johannesburg Stock Exchange and

participate

as

authorised

dealers

for

the

Department

of

Finance

in

primary

issues

of, secondary trading in, government bonds.Last year, non-residents accounted for 28.5 per cent of the total value of transactions in s the Johannesburg Stock Exchange, and for 16.2 per cent of the total value of transactions in traded on the South African Bond Exchange.

The development of the South African financial markets in recent years was therefore supported to an important extent by the active partici of non-residents.

In the process, South Africa not only succeeded in rejoining the world fin markets, but also in keeping abreast of the major developments in the process of globalisati financial markets.

## The phasing-out of exchange controls as a contributing factorAn important precondition for the incorporation of the South African financial markets in global

economy

was

the

lifting

of

exchange

controls.

South

Africa

had

to

face

this

daunt challenge in 1994 with the knowledge that the country had no foreign reserves at its dispos that stage to finance any net outflow of capital.

It had to rely, therefore, on inflows of generate the foreign exchange reserves that would be needed for the financing of any outfl following upon the removal of the controls.In the beginning, the South African monetary authorities were often criticised for not being bold, and for following a policy of gradualism instead of a 'big bang' approach for the remov exchange controls.

In retrospect, and taking account of the magnitude of the gross flows int out of South Africa over the past five years, the path followed by the authorities was undou the correct one.On balance, and on a gross basis, non-residents increased their claims on South African resi by

more

than

R200

billion

over

the

past

five

years.

This

enabled

South

Africa

to

finance accumulated current account deficit of about R40 billion, to increase the net foreign reser about R35 billion, and to allow private South African residents to accumulate about R130 bil in foreign assets.

This included about R60 billion of foreign direct investment by South Af corporates, about R65 billion held by institutional investors in foreign assets, and about R4 invested by private individuals outside of the country.The process of the gradual removal of exchange controls resulted in the effective withdrawa about 70 per cent, [or even more], of the exchange controls that existed at the beginning of At this stage, South Africa has no effective exchange controls any more on:- current account transactions of the balance of payments; or- the inward or outward transfer of funds owned by non-residents.In the case of residents, limits were introduced for amounts that can now be invested the country by corporates, institutional investors and private individuals.

The further of

exchange

controls

requires

the

gradual

raising

of

these

ceilings

until

they

are restrictive.The only area in which no concessions of any significance were made so far refers to th funds of emigrants or former residents of South Africa.

The Government must still take a on the implementation of a programme for what will most probably be a gradual release blocked funds of former residents.

## The globalisation processThe

liberalisation

of

the

South

African

financial

sector

and

concurrent

development structure

of

and

volumes

in

the

capital,

money

and

foreign

exchange

markets

support absorption of the South African markets in the process of globalisation.Last week, Mr Andrew Crockett, General Manager and chief executive officer of the Ban International Settlements in Basle, delivered the annual Gerhard de Kock Memorial Lec Pretoria.

He gave the following definition of globalisation:'Globalisation is a term that is widely used, but defies precise definition.

I take process in which geographic and market barriers are being rapidly eroded.

Economic age now able to make financial transactions with little hindrance in all major markets of Not only this, they can switch with increasing ease between different types of inter each of which is in increasingly close competition with the others'.Globalisation

holds

many

advantages

for

a

country

such

as

South

Africa.

It

gives

de countries or emerging markets easier access to the surplus saving of the more mature countries of the world.

The advantages in globalisation for South Africa are clearly il the

figures

on

gross

cross-border

capital

flows

over

the

past

five

years

quoted

a volatility

in

these

capital

flows,

however,

can

also

cause

many

macroeconomic

proble participating countries, particularly in the short-term, when international investment may change very quickly and often unpredictably.Last

year,

South

Africa

felt

the

full

impact

of

adverse

developments

in

the

global markets when large amounts of portfolio funds previously invested in the country were s withdrawn.

To

illustrate

the

severeness

of

this

problem,

the

flows

of

non-resident investments into and out of the South African Bond Exchange last year can be quoted.

In four

months

of

1998,

non-residents

increased

their

holdings

of

South

African

bonds billion.

In the subsequent eight months, that is from May to December 1998, they reduc investments in these bonds by R26 billion, to become net disinvestors of R10 billion fo as a whole.These volatile capital flows had serious implications for the South African financial m exchange

rate

of

the

rand

depreciated

by

about

20

per

cent;

liquidity

was

drained domestic banking sector; interest rates rose to extremely high levels, and the rate increased

from

5

per

cent

in

April

1998

to

9.4

per

cent

in

December

1998.

These developments in the financial markets had a serious depressing effect on growth in t African economy.South

Africa

was,

of

course,

not

the

only

country

that

was

so

hard

hit

by

the

adve developments in the global financial markets that began as a more localised East Asian cris the second half of 1997.

In the end, emerging markets in Latin America, Central and East Europe

and

in

Africa

all

suffered

from

the

contagion

effect

of

the

East

Asian

crisis. financial markets in the industrial countries were affected, as evidenced by the near-coll September 1998 of the Long-Term Capital Management fund in New York.There are at this stage numerous initiatives in progress at the international level to imp international financial architecture in an effort to create greater stability in the globa markets.

It is widely accepted, however, that the developments of the past decade cannot be r back.

In the words of Professor Klaus Schwab of the World Economic Forum:'The financial globalisation is no longer a process - it is now a situation.

We should there longer talk of globalisation, but rather of globality'.

## The outlook for South Africa as an emerging marketThe question can now be asked what the outlook for South Africa is as an emerging market in t unfolding brave new world?Firstly, what are the prospects for the further expansion of the South African financial mark is unlikely that the rate of expansion in the volumes in the various markets experienced ov past few years will be maintained.

There are, however, a number of further important struc reforms now in progress that will provide further stimulus, further expansion and more growt the markets.

A few can be mentioned:- The implementation of the STRATE (Share Transactions Totally Electronic) system of the Johannesburg Stock Exchange to provide a secure electronic settlement environment for shar transactions;- The

immobilisation,

dematerialisation

and

concentration

in

a

fully

electronic

Cent Securities Depository of paper scrip and certificates to facilitate immediate payment ag delivery of financial asset transactions;- The further extension of the National Payment, Clearing and Settlement System (SAMOS) to provide for real-time on-line settlement on a gross basis for all large transactions, an day settlement for all transactions with and within the banking sector;- The further extension of international participation at all levels in the South African f markets.Secondly, will the remaining exchange controls be removed to provide a further stimulus to development

of

the

South

African

financial

markets?

Here

again,

the

answer

must

be

in

t positive.

The removal of exchange controls is a one-way process that should not be reversed, even when international capital flows go against the country, as happened in the past year.The continued integration of South Africa in the world financial markets will force a great of the versatile major driving force of globalisation, and that is electronic communicatio emergence

of

a

global

electronic

network

for

trade

(e-commerce),

financial

transactions payments) and money transactions (e-money) makes the retention of exchange controls on curren account or capital transactions virtually impossible.Thirdly, will the process of financial globalisation continue, and will it provide further st the

expansion

of

financial

markets?

It

is

true

that

globalisation

played

havoc

with

thefinancial

markets

last

year

and

created

many

macroeconomic

hardships,

particularly emerging markets of the world.

It is also true that there is some backtracking by certa from the process of globalisation.It is also true that the integration of the world financial markets is a process that South Africa's attitude is therefore not to withdraw from globalisation, but rather to the

lessons

of

the

past,

and

to

adapt

more

effectively

to

the

vicissitudes

of

this financial environment.

In the final situation, South Africa with its low domestic savin urgent

requirement

for

the

expansion

of

its

production

capacity,

needs

foreign

inves finance economic development in the interest of all the people of this country.The process of globalisation brings with it growing competition amongst the approximate countries that have now been grouped together as the emerging markets of the world.

In mainly from the industrial countries, have many options on where they can invest thei South Africa came through the financial turmoil of the past eighteen months relatively banking sector stood up to the strains without any major mishap, the financial markets to function effectively, and the macroeconomic adjustments were painful but neverthel severe than in most of the other affected countries.

Perhaps our fiscal and monetary po not as bad as local critics perceived them to be.

The final assessment is now being m global markets.

Some foreign investments are beginning to flow back into South Africa.

S beginning of this year, non-residents have again increased their holdings of South Afri by almost R4 billion.The world financial markets are returning to a situation of more stability.

Serious eff being made at the multinational level to improve the architecture of the world financi After the turmoil of the past eighteen months, a period of sobering consolidation will have a salutary effect on this exciting process of the worldwide integration of financ In the longer-term, the process will continue.

And South Africa will hopefully continu active participant in the process, and will come out as one of the winners in this very environment.