Xolile P Guma: South Africa's macroprudential policy framework and
economic overview
Introductory remarks by Dr Xolile P Guma, Deputy Governor of the South African Reserve
Bank, at the launch of the March 2010 Financial Stability Review, Pretoria, 28 April 2010.
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Members of the press, other guests and colleagues,
The Financial Stability Department has existed since 2001, its task being to identify possible
threats to financial stability and suggest ways in which these could be mitigated. In pursuit of
this objective the department, on behalf of the Bank, publishes the Financial Stability Review
semi-annually. Today the Bank releases the March 2010 edition of this publication.
Following the international financial crisis, the financial stability responsibilities of various
central banks have become more explicit. The financial crisis has demonstrated, in general,
that, although microprudential supervision makes a valuable and indispensable contribution
to financial stability, it may be insufficient on its own to ensure systemic financial stability. For
this reason, a macroprudential approach to policy formulation is necessary to complement
microprudential supervision, and in fact monetary policy. The aim of such a policy would be
to smooth the impact of the economic cycle on the financial system and contain the build-up
of systemic risks in the financial system as a whole. The Bank is, therefore, currently in the
process of developing an integrated framework for a macroprudential policy approach to
achieve its financial stability objective, and to help co-ordinate financial stability policy of
other authorities.
The global financial crisis has also led to wide-ranging debate on the need to enhance the
international regulatory framework in order to strengthen the global financial system and
improve its resilience to shocks. The proposals for reform have gone beyond banking sectors
and have been expanded to include insurance industries, rating agencies, hedge funds and
accounting standards.
Since the release of the September 2009 Financial Stability Review, the risks to global
financial stability have eased and systemic risks have continued to subside as the global
economic recovery has gained momentum. The recovery has been instrumental in
moderating earlier high levels of uncertainty. Financial stability, nevertheless, remains to
some extent, fragile in many economies, including those emerging-market economies
hardest hit by the crisis. Advanced economies, in particular, are still faced with the challenge
of repairing damaged financial systems, on the one hand, and introducing regulatory reform,
on the other. Relatively conservative monetary and fiscal policies and structural reforms
before the global financial crisis have helped many African countries to withstand the effects
of the crisis better than during previous crises. The main risk facing Africa remains a stalling
of the global economic recovery. This could place downward pressure on commodity prices,
which could also undermine government revenues and raise public debt to unsustainable
levels.
In South Africa, economic performance started improving in the third quarter of 2009 and
continued at a markedly stronger pace in the fourth quarter, as the economy gradually
emerged from the recession. Confidence in the financial services sector increased further in
the fourth quarter of 2009, boosted mainly by higher levels of confidence among investment
managers and life insurers.
The banking sector continued to maintain levels of capital well above the minimum prudential
requirement. Despite the recovery in real economic activity, bank loans and advances
contracted during the period under review. The contraction in credit extension had both
demand and supply-side elements. On the demand side, it would appear that households
continue to be reluctant to incur more debt, while on the supply side lending standards have
remained tight. Although credit losses had been increasing consistently over the past two
years, the pace of deterioration in the asset quality of banks moderated during the second
half of 2009. Banking profitability dropped somewhat during the second half of 2009, but
efficiency has remained fairly stable over this period.
The financial strength of long-term insurers in South Africa was assessed as being generally
sound, based on the capital-adequacy levels. Other financial soundness indicators for typical
long-term insurers, however, suggest that this sector continued to experience some strain.
Financial conditions in the short-term insurance sector also deteriorated during the fourth
quarter of 2009. In line with developments in international equity markets, the upward trend
in the domestic equity market, which started in March 2009, continued in the second half of
the year.
Business confidence increased in the fourth quarter of 2009, following persistent declines
since the third quarter of 2006. The improvement in business confidence is consistent with
some of the other leading indicators that generally precede a recovery in economic activity,
and currently herald an improvement in economic conditions. Other indicators for the
corporate sector, however, confirmed that the sector was still under pressure.
Confidence in the residential property market also showed some signs of recovery. In
addition, the decelerating growth in mortgage advances, as reported by banks, bottomed out
in December 2009 and started to show signs of an upward trend. The business operations of
non-residential building contractors were, however, still constrained by a lack of demand for
building work.
The household sector experienced some financial strain as job losses constrained
disposable income. Although most indicators show that the decline in the real economy had
bottomed out in the first half of 2009, consumers were, until the third quarter of 2009, still
somewhat pessimistic about the prospects for future performance of the economy and its
impact on their finances. The elevated rate of unemployment continued tight lending
conditions and a need to address weaker household balance sheets are expected to
continue to impact consumption expenditure negatively. Also, on average, the credit standing
of consumers has continued to deteriorate.
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.