Xolile P Guma: South Africa's Financial Stability Review - key issues in
March 2011
Introductory remarks by Dr Xolile P Guma, Senior Deputy Governor of the South African
Reserve Bank, at the launch of the March 2011 Financial Stability Review, Pretoria, 20 April
2011.
* * *
Members of the press, other guests and colleagues
On behalf of the South African Reserve Bank, I would like to welcome you to the release of
the March 2011 edition of the Financial Stability Review; the fifteenth publication in this
series.
The Bank knows that it is not the sole custodian of financial-system stability. Financial
stability is a responsibility that it shares with other role-players and it is well placed to take a
leading role. To pursue the maintenance of financially stable conditions and contain systemic
risk, the Bank continually assesses the stability and efficiency of the key components of the
financial system and formulates and reviews policies for intervention and crisis resolution.
The assessment largely takes the form of the Financial Stability Review.
I turn now to the Financial Stability Review and highlight some of the key issues that the
March 2011 edition addresses. First, the Review indicates that during the second half of
2010 global macrofinancial conditions improved broadly, although pockets of vulnerability
and risk remain and significant policy challenges still need to be addressed. Global economic
activity moderated somewhat as the brisk recovery phase following the global financial crisis
turned into a slower and, hopefully, more sustainable recovery. The multi-speed nature of the
recovery continues with subdued economic growth and high unemployment in advanced
economies, and buoyant economic activity and rising inflationary pressures in many
emerging market economies.
The financial risks in advanced economies that might impact on the stability of the South
African financial system, and which are discussed comprehensively in the Financial Stability
Review, are

vulnerabilities in the euro area;

banking-sector vulnerabilities;

negative sentiment and declining prices in real-estate markets in a number of
advanced economies; and

a broadening of the concept of global imbalances as trade, fiscal and investment
imbalances have increased.
Emerging market economies as a group remained important drivers of global economic
growth in the second half of 2010 with countries in developing Asia recording the most rapid
growth among all of these countries. Emerging market economies are, however, also
exposed to lingering downside risks in the form of rising inflationary pressures, the possibility
of sudden reversals of capital inflows and sharp increases in the level and volatility of
commodity prices. In many sub-Saharan African countries economic growth has returned to
pre-crisis levels, but growth prospects will depend on a sustainable recovery in the global
economy. Recent political instability in the Middle East and North Africa region, and the
resulting rise in oil prices, coupled with rising food prices, pose significant challenges to the
economic outlook in the sub-Saharan Africa region.
Various groupings of financial authorities and international standard setters, including the
Group of Twenty Forum, the Basel Committee on Banking Supervision and the Financial
Stability Board are actively contributing to initiatives to create a stronger international
regulatory framework. At the same time, countries have responded by reforming national
regulatory systems. The roles and responsibilities of central banks in regulating and
supervising financial systems have been extended in some jurisdictions. Principles are being
developed to deal with the "too-big-to-fail" moral hazard problems and to increase the
capacity to absorb losses of systemically important financial institutions. In addition,
regulatory gaps are increasingly being closed in various jurisdictions by extending the
regulatory perimeter to include hedge funds, private equity funds and rating agencies, and
more transparency and accountability in the derivatives market are envisaged. It is trusted
that these initiatives will contribute to a more stable global financial system.
In South Africa, despite positive signs of economic recovery, high levels of unemployment
continued to place a damper on activity in the domestic financial system. Nevertheless, the
banking and insurance sectors maintained high-quality capital and liquidity buffers well above
the minimum prudential requirements, and remained profitable. Gross loans and advances
increased in December 2010 compared to a year ago, albeit at a moderate pace. The rising
trend in the growth rate of impaired advances seems to have peaked and indications are that
it may start to decline in the near future.
The high levels of capital inflows that featured in many emerging economies in 2010 and that
created significant policy challenges for South Africa, reversed somewhat in the fourth
quarter of 2010. This trend continued into 2011 as non-residents became net sellers of local
currency bonds and equities. The way forward will depend largely on the future recovery of
the global economy and the unfolding events in Europe. Recent tensions in the Middle East
and North Africa countries, the substantial impact on oil prices, and developments in Japan,
together with increased prospects of further monetary policy tightening in advanced
economies, will be developments of which to take note.
Although household debt to disposable income remained at elevated levels and the profile of
credit-active consumers worsened somewhat in the fourth quarter of 2010, the improved
outlook for economic growth in 2011 could boost the confidence level of consumers in South
Africa. In the corporate sector, the increase in profitability, as reflected by the gross operating
surplus, and the increase in the annual growth rate of credit extended to the sector, are
possible indications of a recovery in business confidence. In the property market, property
price indicators have been declining over the past year, despite lower interest rates and
rising real income. Job losses, which negatively affect consumers' ability to take up new
credit, might have had an impact on prospective homeowners' ability to purchase a
residence.
Recent developments enhancing the robustness of the financial regulatory environment in
South Africa include reviewing the prudential framework for foreign investment by private and
public pension funds, reviewing the framework for cross-border direct investment in South
Africa, the release of the final draft of amendments to regulation 28 of the Pension Funds
Act, and reviewing the Securities Services Act as part of a process to consolidate several
financial services acts.
I have briefly highlighted the key issues raised in the Financial Stability Review. More
detailed analyses are available in the publication itself, and will be highlighted by the authors'
presentations. I trust that you will find these interesting, stimulating and relevant to the
current environment and invite you to provide comment as part of the important process of
ongoing debate on financial stability.
Thank you