T T Mboweni: A financial and economic review of the year
Remarks by Mr T T Mboweni, Governor of the South African Reserve Bank, at the Annual Dinner in
honour of the Ambassadors and High Commissioners accredited to the Republic of South Africa,
Pretoria, 24 November 2005.
* * *
Your Excellency, the Dean of the Diplomatic Corps
Your Excellencies, Ambassadors and High Commissioners
Your Excellency, the Chief of State Protocol
Your Excellencies, Heads of International Organisations represented in the Republic of South Africa
Deputy Governors of the South African Reserve Bank
Senior officers of the South African National Defence Force
Senior Management of the South African Reserve Bank and their spouses/partners
Editors and other media representatives
Ladies and Gentlemen
Dear Friends
Welcome once again to this annual dinner in honour of the Ambassadors and High Commissioners
accredited to the Republic of South Africa. It has been yet another challenging year for South Africa on
many fronts, and although you are no doubt familiar with many of these issues, I wish to highlight
briefly the most noteworthy international and domestic financial and economic developments that have
transpired since the Bank was honoured by your presence last year.
Economic and financial conditions in the international economy have remained generally benign in
recent months although there have been a number of challenges. Led primarily by China, India and
the United States, the world economy continued to grow at a solid rate although growth projections for
2005 in most countries have been revised downward slightly - with the important exceptions of key
Asian economies. The major global imbalances, such as the difference between the US and Asian
propensities to save, show no significant signs of reversal. However, underlying inflationary pressures
in most countries generally have remained muted, resulting in little transmission of price pressures to
the South African economy.
Real gross domestic product growth in the US economy remained strong during the first three quarters
of 2005. However, real economic growth in the euro area, South Africa's largest trading partner, was
comparatively disappointing, while growth in most developing countries exceeded expectations. The
relatively strong world economy, favourable prices of commodity exports and improved policies
contributed to an acceleration in growth on the African continent. Non-oil commodity prices have
continued to rise during 2005, with strong demand for metals from the US and China -where the
manufacturing and construction sectors are recording robust growth - driving prices higher. Prices of
iron ore, copper and uranium in particular have risen significantly in recent months. The gold price in
dollar terms has also shown a significant increase over the same period as a result of fears of rising
global inflation; concerns about geopolitical security; mounting speculation regarding a possible
reversal in central bank gold sales; declining mining supply; and strong fabrication demand for gold.
Global real gross domestic product grew by about 5 per cent in 2004 and is projected to increase by
41⁄2 per cent in 2005. Growth in some of the developed economies slowed in the second quarter of
2005 while emerging-market economies continued to record robust growth. However, to date the
impact on global growth of higher oil prices has been moderate, reflecting in part the fact that higher oil
prices have been largely the result of strong global demand. Even though core inflation rates have
remained benign, overall inflation rates in most countries have already increased somewhat in
response to the sharp rise in oil prices. The world economic outlook therefore remains somewhat
clouded by large global imbalances and rising crude oil prices.
Crude oil prices have risen significantly over the past year and have on occasion touched US$70 per
barrel. This can mainly be related to robust demand for oil emanating from particularly the economies
of China and the US, notable supply side shocks emanating from the hurricane season, and continued
geopolitical concerns. The oil price is likely to continue exhibiting considerable volatility and is
expected to remain at relatively high levels in the near term mainly due to strong demand and
supplyside tightness. The rise in global energy prices will continue to exert downward pressure on the
purchasing power of households and international inflation is likely to continue edging upwards in the
next few months. World inflation is projected to increase to 3,9 per cent in 2005 from 3,7 per cent in
2004. Fortunately, relatively well-anchored inflationary expectations and declining oil intensity in
production have served to soften the blow to the global economy so far. Single-digit inflation - and low
single-digits , at that - is the norm for the overwhelming majority of countries represented here tonight.
If the oil price continues to escalate, second-round effects of price rises could become more
prominent, thus leading to a further acceleration in global inflation. However, the short- to medium
term global inflation outlook remains positive, particularly in view of the fact that inflationary
expectations remain somewhat well anchored and output gaps in most countries are not subject to
undue pressure. Notwithstanding these slightly adverse developments, global economic expansion is
expected to remain broadly on track against the background of continued supportive global financial
conditions.
Turning to developments in South Africa, it is pleasing to note that the record upswing in economic
activity continues apace. What is particularly gratifying is that the rapid expansion in economic activity
in the second quarter of this year marked the twenty-third consecutive quarter of uninterrupted growth
since the economy began the current upswing in 1999. This is the longest upswing in the recorded
economic history of our country, and is a truly remarkable achievement given the domestic, regional
and international challenges that have confronted South Africa during the course of the upswing.
The consolidation of inflation at low levels has enhanced macroeconomic stability and contributed to
the strong growth in the South African economy and the record upswing is testimony to an increasingly
stable and transparent macro-economic policy framework that has been developed meticulously over
the past decade. This has resulted in increasing levels of domestic and international investor
confidence in South Africa that augurs well for the domestic economic growth outlook. Allow me to
highlight a number of the most important domestic developments since I had the privilege of
addressing you last year.
A significant milestone was reached at the end of last year when the rand was included in the
Continuous Linked Settlement (CLS) system - currently being one of only 15 currencies settling
through CLS. It is now possible to make a payment here in South Africa and have it immediately
transferred to a beneficiary abroad in one of the other 14 currencies' areas without the risks attached
to delay in settlement.
The sustained capital inflows into the country have allowed for a continued build-up of the official
foreign reserves and have contributed to increased exchange rate stability. The South African Reserve
Bank's gross reserves now stand at almost US$20 billion - more than US$5 billion higher than a year
ago. This was despite a fairly large deficit on the current account of the balance of payments. As you
are aware, South Africa currently imports more than it exports. This is to be expected, given the
growing economy which requires more capital goods - often imports - and which allows for more
consumption, some of which also involves purchases of imported goods. However, the
financialaccount inflows have exceeded the current account shortfall.
Your Excellencies would know only too well that the exchange rate of the rand has depreciated
somewhat, on balance, since the end of last year. Against the US dollar, for instance, the rand
depreciated notably: a US dollar cost less than R5,70 towards the end of last year, but currently would
put you back about R6,60. Against a basket of currencies, the rand has depreciated by roughly 6 per
cent since the end of last year. The relatively moderate amplitude of the exchange rate movements of
the rand - against a basket of currencies, at least - should be welcomed.
Prices in the financial and real-estate markets have reached new record highs. The financial and
realestate markets remained buoyant, but with the changed outlook for mortgage interest cost, the rate of
increase in real estate prices, which at times exceeded 35 per cent on a year-on-year basis, tapered
off over the course of 2005. Its most recent reading is still a quite strong 16 per cent. So embassy
property must have turned out to be well-performing investments indeed.
The price stability objective in South Africa continues to be strongly supported by government's
management of its financial affairs with the National Government Budget for fiscal 2005/06 again
formulated within a framework of fiscal discipline but with more emphasis on infrastructure
development and a budget deficit for 2005/06 now projected to amount to only 1,0 per cent of GDP,
compared to the 3,1 per cent of GDP projected in February.
The government debt consolidation process has allowed the cost of borrowing to decline markedly.
Even though debt issuance has increased since 2003/04, sound debt management has been such
that new issuance is spread across the maturity spectrum of the yield curve. The latter normalised
somewhat in recent months owing, among other things, to the fact that the National Treasury
increased supply at the longer end of the curve.
With the cost of borrowing falling as dramatically as it has, the bond market has become a more
appealing corporate finance tool and, as such, corporate bond and commercial paper listings have
become more popular. The corporate bond market has increased considerably in size - expanding
from just under R40 billion in 2002 to over R130 billion today - an increase of over 200 per cent!
The improvement in South Africa's long-term foreign currency debt rating from BB (high risk,
speculative grade credit) in 1994 to BBB+ in 2005 (investment grade rating), made South Africa's debt
much more attractive to the international investing community. The most recent upgrades by Fitch and
Standard and Poor's contributed towards tighter spreads on South African debt. The yield spreads on
South African foreign-currency denominated bonds continue to remain substantially lower than those
of emerging markets in general (the Emerging Market Bond Index), indicating that investors share the
confidence expressed by international rating agencies and regard South Africa in an increasingly
positive light in comparison to competitors.
Non-residents have been very active participants in the domestic bond and equity markets this year.
Non-resident participation in trading on the Bond Exchange, measured as the sum of their purchases
and sales as a percentage of total purchases and sales of bonds, increased markedly from a level of
about 9 per cent in early 2004 to as high as 18,9 per cent in early 2005. Furthermore, non-resident
participation in share trading on the JSE averaged approximately 20 per cent in both 2004 and 2005
thus far.
The Eurorand bond market witnessed a flurry of activity this year, with a total net issuance size for
2005 of close to R6 billion, the highest net issuance since 1999. The issuance of rand-denominated
bonds by non-resident borrowers in the Japanese Uridashi market also continued to grow during 2005.
Rand-denominated bonds were first issued in that market in July 2004 and total issues for that year
amounted to R2,5 billion, while issuance amounted to R7,5 billion in 2005. The demand for
randdenominated bonds issued by highly rated non-resident institutions contributed positively to the value
of both the rand and domestic bonds.
We also witnessed some secondary listings of foreign companies on the JSE Limited and the first
listing of a non-resident bank on the Bond Exchange, again displaying confidence in South Africa (the
relations between South Africa and so many countries in the rest of the global village, evidenced by
the number of embassies and high commissions stationed in South Africa, bears testimony to this
confidence).
The South African banking sector benefited greatly from the improved macroeconomic conditions -
profitability, efficiency and the asset quality of banks improved despite continued strong growth in the
total loan book. An important structural change also occurred in South Africa's banking sector after an
international bank obtained a controlling share of a major local bank by means of the largest single
foreign direct investment into South Africa to date - together with other significant foreign direct
investment announcements which are also indicative of an increasingly positive investment outlook for
South Africa.
Broadening access to financial services and targeted investment remain high priorities on the agenda
for South Africa and our financial sector, and the Bank continued to monitor and support new
initiatives. In terms of a Memorandum of Understanding between the banking sector and the
Department of Housing, the banking sector will advance R42 billion in low-income housing finance by
2008.
The Bank continued to make a significant contribution to economic co-operation in Africa by for
expample liaising closely with the Association of African Central Banks regarding the implementation
of the African Monetary Cooperation Programme and participating in an ongoing study outlining the
costs and benefits of the creation of a common central bank for Lesotho, Namibia, Swaziland and
South Africa (the decisions in this regard will be taken by the political leaders of these countries).
In February 2005 the Bank hosted a Seminar with the European Central Bank (ECB), attended by
Southern African Development Community (SADC) Central Banks in which views on the road towards
a Single Central Bank for SADC were discussed against the background of the ECB experience. The
MoU on the Harmonisation of Legal and Operational frameworks of SADC Central Banks was finally
approved by Ministers for Finance at their meeting held on 5 August 2005 after extensive
consultations. At their September 2005 meeting, the Committee of Central Bank Governors (CCBG) in
SADC signed Memoranda of Understating (MoUs) on Exchange Control, Information and
Communications Technology and Payment, Clearing and Settlement Systems.
In May 2005, the Bank was privileged to host the first Financial Stability Forum (FSF) African Regional
Meeting. Participants included ministers of finance, governors of central banks and senior officials
from finance ministries, central banks and regulatory authorities from various countries in Africa as
well as members of the FSF.
In June 2005 the Bank participated in workshops on a SADC cross-border settlement model. The
Bank, in conjunction with other central banks in the SADC region, is investigating options to facilitate
the settlement of cross-border payments within the region.
The Bank contributed significantly to the development and deployment of the Bank Supervision
Application solution, a computerised system which was developed on behalf of SADC and some East
African countries. This application was deployed in all eleven participating countries and is utilised to
supervise commercial banks and other financial institutions.
International involvement obviously extends beyond Africa and the Bank continued participating and
collaborating in the activities of a number of international organisations, central banks and universities.
For example, a highly successful G-20 seminar on economic growth, co-hosted by the Bank along with
the People's Bank of China and the Banco de México, was held in Pretoria in August 2005, and the
findings were discussed at the meeting of deputy finance ministers and deputy central bank governors
in China in September and ultimately at the meeting of finance ministers and governors in October at
the Grand Epoch City, Xianghe, Hebei Province, China.
In August I mentioned in my address to shareholders of the Bank that closer economic co-operation in
the SADC region and the African continent will increasingly become a key strategic focus area in the
years ahead. The Bank has for example during the course of the year once again rendered technical
assistance to various other central banks in the region. The pursuit of price stability will nevertheless
remain the primary objective of the Bank. The consolidation of inflation at lower levels and with lower
variability is by far the most important contribution the Bank can make to the economic development of
South Africa and by implication that of the subcontinent.
Of particular importance therefore from a monetary policy perspective is that CPIX-inflation remains
within the target range of 3 to 6 per cent. Considerable success has been achieved in pursuit of major
policy objectives and the South African Reserve Bank remains committed to ensuring that the
hardwon gains in the fight against inflation are not forfeited. Inflation has extended its stay within the
3-to6-per-cent target range to 26 months - more recently amid a strongly growing domestic economy and
robust domestic demand. The inflation outlook has deteriorated moderately over the past few months,
mainly as a result of developments in international crude oil prices. Although domestic demand and
output remain buoyant and point to some additional upward pressure on inflation, there is still little
evidence of demand pressures or second-round effects of oil price increases impacting on inflation. Oil
prices, domestic demand and output developments nevertheless pose significant risks to the inflation
outlook and monetary policy will have to remain vigilant.
Finally, you would have noticed during the course of the year that increasing prominence is being
given by government to investigating all the feasible ways of achieving stronger economic growth.
Whereas growth in real gross domestic product amounted to 3,7 per cent in 2004, the October
Medium Term Budget Policy Statement
provided for real growth of 4,4 per cent in 2005 and
approximately the same rate of growth in 2006. Despite some progress made in recent years,
continued high levels of unemployment necessitate even more ambitious steps to strengthen South
Africa's growth potential in order to achieve sustainable higher economic growth. The South African
Reserve Bank is committed to doing its part by containing inflation, thereby providing a launching pad
for enhanced growth, development and employment creation. But as I have mentioned on various
occasions during the course of this year, this is not a sufficient condition for stronger growth.
Enhanced infrastructural development, the implementation of education and skills development
programmes which deliver the skills necessary for a modern economy, and careful land and
agriculture reform, greater infusion of technology in the economy, and labour market reforms are some
of the most important prerequisites for boosting economic performance and employment creation. The
macroeconomic policy setting is appropriate. Going forward, structural reforms will be key to unlocking
the economic growth and development potential of South Africa. The authorities are on the correct
path. All of these reforms need to be nurtured carefully as it takes a while before they bear fruit.
However, it is crucial that they be supported throughout by a stable and transparent macroeconomic
policy framework.
As always, the senior staff of the Bank present at your tables will be available if required to clarify any
of the remarks I have made during this evening. Meanwhile, a hearty welcome once again and thank
you for accepting our invitation to this Annual Dinner in honour of Ambassadors and High
Commissioners accredited to the Republic of South Africa. Your attendance is much appreciated.
Thank you.