Mr. Stals addresses the topic 'Implications for the South African financial sector of the process of financial globalisation'  (Central Bank Articles and Speeches, 8 May 98)
Central bank: sarb | Type: speech | Date: 1998-05-08

Mr.

Stals addresses the topic 'Implications for the South African financi sector of the process of financial globalisation' Speech by the Governor of the South African Reserve Bank, Dr. C.

Stals, at the Tenth Annual 'Beeld' Economist of the Year Banquet, h Johannesburg on 8/5/98.

## 1.

Lessons from the East Asian crisisRecent developments in certain East Asian countries focused attention on the pitfalls for the smaller economies of the world on the road to financial globalisation.

Th the collapse of financial markets in East Asia may differ from country to country, but a fe shortcomings in the economies of the afflicted countries were identified:Firstly, in many countries, inappropriate macroeconomic policies were appli defend artificial exchange rates, and/or to maintain interest rates at untenable low l countries were highly successful for many years and they achieved remarkably high av economic growth rates over an extended period of time.

Based mainly on an industrious and labour force, they were able to remain competitive, despite the emergence of underlying we in the economic fundamentals.Secondly, the financial systems did not keep pace with the changing macroecono environment.

Banking institutions were not properly regulated and monitored, and financial were distorted by undue governmental intervention.

In some cases, there were insufficient d of basic information that could have enabled investors to make a better assessment deteriorating situation at an earlier stage.Thirdly, the countries became overly exposed to foreign capital flows, and vul balance of payments positions developed that could not be managed once confidence faded. current account deficits were no longer covered by total capital inflows, and the with short-term funds from some countries exacerbated the situation.Fourthly, bad governance in public and private sector institutions did not re seriousness of the underlying adverse developments, and did not take timely corrective acti the bubble finally burst, the situation had already advanced to a stage where only costly macroeconomic restructuring could salvage these economies.The experience of the afflicted East Asian countries provides ample evidence vulnerability of the smaller, emerging market economies in the environment of fi globalisation.

Other countries, including South Africa, can also be subjected by the glob markets to similar painful corrections, although it might be for completely different re lesson for South Africa from the East Asian crisis is therefore to be alert, to be cautio aware of the harsh but not unreasonable disciplines of the global markets.

## 2.

South Africa and financial globalisationOver the past few years, the South African financial sector has moved quite the road of globalisation.

In the Annual Report for 1997 of the Bank Supervision Departmen Reserve Bank, interesting information has been made available about developments in the African banking sector in 1997.There are now more than 20 foreign banks operating in South Africa thro locally-established branches or subsidiaries, and more than 60 foreign banks with repre offices in South Africa.

South African banks are also extending their activities to theworld and during 1997 obtained permission from the Registrar's Office to establish mor 45 branches, subsidiaries, and representative offices in other countries around the world.At the end of 1997, the total South African banking sector utilised more R35 billion in foreign funding, and carried loans extended by them in foreign currencies R17½ billion.

The foreign liabilities and foreign assets of the South African bankin respectively, represented but small percentages of the total assets (or total liabilities) sector, estimated at about R440 billion as at 31 st December 1997.

Foreign funds as a source of financing of the activities of South African banking institutions are, however, still increIt is well-known that non-resident investors have become very important partic in the South African financial markets.

Over the past 16 months, that is since the beginni non-resident investors increased their holdings of South African equities by R45.6 billion holdings of South African bonds by R31.1 billion.The South African Government raised a total amount of approximately R11.3 bill in seven public loan issues made in international capital markets since December 1994.

At time, many South African public and private sector borrowers also made use of the foreign markets to fund the expansion of their activities in South Africa, and in the rest of th gradual relaxation of exchange controls has indeed enabled South African residents to acqu foreign assets abroad.

The following estimates provide some indication of the extent investments since the beginning of 1994:R44.3 billiR37.4R1.1| Direct foreign investment by South African corporates | ||-------------------------------------------------------------|-------------|| Portfolio foreign investment by South African institutional | investors || Portfolio foreign investment by South African private | individuals |Volumes in the South African foreign exchange market increased substantiall recent times.

At this juncture, it is not unusual to have a daily turnover in excess of US$ this market.One further indication of the extent to which South Africa has already become the global financial markets can be found in the expansion of the Euro-rand market.

The tot outstanding in this market, where non-resident borrowers raise funds in rand-denominat issues made to non-resident (mainly European) investors, now exceeds R37 billion.

## 3.

Consequences for the South African economyThis process of the globalisation of the South African markets has impo consequences for the South African economy.

The major advantage for South Africa is, of that the scarce sources of finance for economic development can be supplemented with inc amounts of foreign funds.

Savings of more developed countries are therefore transferred Africa to supplement domestic saving.The large inflow of funds over the past four years enabled the Reserve Ba increase the country's official foreign reserves from a small to a more acceptable a R33 billion, which is sufficient to cover about three month's imports of goods.

This inc made it possible to substantially relax exchange controls in order to create a more free ma should eventually contribute to a higher economic growth rate.It is necessary that foreign investments make a more purposeful direct contrib real economic development in South Africa, and not only to the restructuring of the financi˝To achieve this, South Africa must ensure that attractive and competitive investment pro available for this purpose.The globalisation of South Africa's financial markets, however, have impo consequences for the analysis of South African financial conditions, and in particula forecasting of possible future developments in South African financial aggregates.

The exch of the rand is consequently more subject to the inclinations and whims of foreign investo as to developments in the foreign exchange markets of nearly all the other parts of the w well the South African financial authorities may plan and manage, developments over whic have no control can change the exchange rate of the rand, especially against individual cu a direction which was not expected or could not be forecasted.

These kinds of changes can disruptive over the short term.This also applies to South African interest rates.

A sudden inflow of funds f rest of the world can lead to a decline of South African interest rates against the run of South African economy or the objectives of the monetary authorities.

Similarly, an outflow arising from developments in a distant country, such as for example Indonesia, can very e to an increase in South African interest rates when we would have liked to have seen a declSouth African share prices are also affected by the views of foreign investors not always truly reflect the actual potential of South African companies.

Developments in in London, New York, Paris and Tokyo often have a greater influence on these prices developments in South Africa.Even the South African inflation rate tends to move to lower levels in acco with the inflation rates in the rest of the world.

Inflationary errors that are made w macroeconomic policy under these circumstances, will often have a detrimental effect on t African balance of payments, or aggregate domestic economic activity, before leading to an in prices.

## 4.

Economic forecasting: a difficult taskAgainst the background of the international integration of financial mark becomes much more difficult to predict developments in financial aggregates, such as inter exchange rates and the inflation rate.

It does not only depend on what happens in the bet own national economy, but requires a broader cosmopolitan knowledge.

Mr.

Alan Greenspa decisions often can have a greater influence on the developments of these aggregates in Sou than decisions of the Governor of the South African Reserve Bank.Unfortunately, businessmen, investors and economic policy makers often have to a view about possible future developments in these financial aggregates.

The decisions the take are mainly concerned about the future, and not about the past or present situation.

I essential that forecasts be made, even if it is done in a framework of greater uncer unforeseeable future developments.

With all the modern electronic technology which is avai facilitate forecasts, the world of the actual economy remains too uncertain to be always coThere are a few basic principles which must be kept in mind when making forec of financial aggregates:1.

Do not believe too much in your own forecasts.

There are good reasons why will often be wrong.˝2.

Do not accuse someone else - for example, the Governor of the Reserve Bank your forecasts are wrong.

He also has only little control over developme these macroeconomic aggregates.3.

Make regular forecasts.

The data on which forecasts are usually based ch often and therefore justify regular revisions of forecasts.4.

Be willing to acknowledge a wrong forecast and produce a new one.

Most peop who take note of your forecasts have in any case already forgotten the la that you made.5.

Remember the assumptions which form the basis of every forecast.

They a often so unrealistic that the forecast is also nearly worthless.6.

Make forecasts on the basis of objective analyses, and not on what suits book or the book of your clients.

It doesn't help to be popular but wrong.7.

Be grateful if you are sometimes right in this difficult game of trial and may not happen again.

## 5.

Concluding remarksThe integration of South Africa in the world financial markets is an on-going that is linking developments in the major financial aggregates in this country more and developments in the rest of the world.Because of this process, economic forecasting has become much more complex.

No only changes in the South African situation influence developments in important fi aggregates, such as interest and exchange rates, but also events in remote places such as IEconomic forecasters have great responsibility, not only to provide consiste sensible forecasts, but also to understand and explain the shortcomings of even their best to remember that even bad forecasts can sometimes become self-fulfilling.˝