T T Mboweni: The restructured South African economy
Address by Mr T T Mboweni, Governor of the South African Reserve Bank, at the South Africa ten
years on - empowerment, finance, trade and investment conference, Cape Town, 20 May 2004.
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1. Introduction
Ladies and Gentleman, thank you for the invitation to speak at this conference. After ten years of
democracy in South Africa, I think it is useful to consider what we have achieved and what challenges
we will still have to face. My address this morning is a summary of a more detailed chapter that I wrote
on this same subject for a book to be published by the World Economic Forum entitled "South Africa,
The Miracle Continues". This may be a book of interest to many of you. I believe it will be launched at
the Africa Economic Summit 2004, which will be held from 2 to 4 June in Maputo, Mozambique.
2. The South African economy in 1994
When the first democratically elected South African government came to power in 1994, the country
was to a large extent economically isolated from the rest of the world. Trade boycotts, economic
sanctions, disinvestment, the withdrawal of other capital and the declaration of a partial debt standstill
from September 1985, forced the authorities to pursue an inward-oriented policy that had a severe
impact on domestic economic performance. At the time of the standstill, the affected debt amounted to
US$13,6 billion and the total debt amounted to US$23,7 billion. As a consequence living standards
deteriorated, economic growth was constrained, unemployment rose, productivity growth slowed down
and economic management became less effective.
The refusal of foreign creditors to roll over the short-term credit facilities of domestic borrowers led to a
shortage of foreign exchange and a confidence crisis in 1985. Despite the debt standstill on the
repayment of foreign debt, capital continued to flow out of the country. At first this consisted mainly of
short-term capital that was not affected by the standstill arrangements. Blocking this capital would
have jeopardised trade flows. Later these capital outflows also included amounts which became
payable in terms of the various standstill agreements. From the beginning of 1985 to 1993 the net
financial outflow from South Africa amounted to about R45 billion, or to 11 per cent of gross domestic
fixed investment.
As a result of this outflow, the South African authorities were forced to generate current account
surpluses. The gold and other foreign reserves of the country remained at low levels and domestic
savings had to be used to finance the withdrawal of capital. The balance of payments constraint
effectively limited the policy options the authorities had at their disposal. Although the forced
repayment of loans improved the overall foreign debt position of the country, the policy of constrained
domestic expansion called for huge sacrifices by the South African population and continued to affect
the domestic economy for a long time after 1994.
3. Global integration
Even before the new government came to power, many countries started to normalise trade relations
with South Africa when it became apparent that the political transition would be negotiated in a
peaceful manner. Trade boycotts, economic sanctions and the disinvestment campaign were
suspended. However, debtors in South Africa had to continue making repayments on debt affected by
the standstill arrangements for a number of years. The standstill only ended on 15 August 2001 when
the final repayment on the affected debt was made. In the meantime, the South African government
started raising funds again on international capital markets from 1995 and non-residents resumed
investing in private entities in the country.
This normalisation of international relations allowed the newly-elected democratic government to
gradually reintegrate the domestic economy into the global environment. High priority was given to the
reform of trade policy in this process.
The trade regime at the beginning of the 1990s was characterised by three interrelated strategies,
namely the promotion of domestic industries through import substitution, the development of specific
industries to attain self-sufficiency and the promotion of mineral beneficiation. South Africa's industries
therefore became heavily protected by formulae, specific and ad valorem duties and surcharges. High
tariff levels were complemented by quotas that limited the quantity of imports. The tariff structure was
extremely complicated. Overall the strategies pursued by the authorities resulted in a complex
discretionary regime with an anti-export bias.
After the transition in 1994, government became committed to a policy of import liberalisation, and
agreed to import tariff reductions to levels even lower than that required by GATT, i.e. the predecessor
of the World Trade Organisation. Key aspects of the trade reform included a five-year tariff reduction
and tariff rationalisation programme; a decrease in tariffs and subsidies on agricultural products and
ad valorem
the conversion of all quantitative restrictions on agricultural imports to rates; an increase in
the number of binding rates applicable on industries as well as in the percentage of zero tariff lines to
total tariff lines; a phasing out of the export subsidy scheme applicable at that time, which was called
the "General Export Incentive Scheme (GEIS)".
As a result of these changes to the tariff regime, the number of tariff categories was reduced from over
100 to only six and the average weighted import duties on manufactured goods to the total value of
manufacturing imports decreased from 14,0 per cent in 1994 to 4,7 per cent in 2002. Several free
trade agreements were also signed to dismantle trade barriers and to gain increased market access.
In addition to these measures undertaken to promote competition, industrial policy was adjusted to
enhance the competitiveness of manufacturing enterprises in export markets. In particular more
emphasis was placed on supply-side measures, rather than demand-side measures such as
expensive export support programmes. These measures included investment incentives for large
investments of a strategic nature and for small and medium enterprise development; training grants to
firms investing in the promotion of skills; the development of industrial development zones; improved
access to finance; and support for investments in economic infrastructure.
A new Competition Act was passed in Parliament in 1998 to, among other things, create a greater
spread of ownership in enterprises, to expand opportunities for South African participation in world
markets and to provide consumers with competitive prices and product choices. The Act further
focuses on preventing any form of anti-competitive conduct by a firm or a group of firms arising from
agreements. Institutions were established in terms of the Act to ensure that these objectives are
achieved and to monitor implementation and adherence to the law.
A further step to reintegrate the South African economy into the world economy was the gradual
dismantling of exchange controls. The financial rand system was already abolished in 1995 and
considerable success has been achieved in relaxing all the other controls. Limits are still applicable on
the amounts that residents and emigrants may repatriate from South Africa, but these limits have been
increased progressively over the past ten years. Moreover a foreign exchange control amnesty and
accommodating tax dispensation were announced in February 2003 to allow individuals to bring funds
back that are held illegally offshore or to pay a 10 per cent charge on funds remaining offshore. The
amnesty offers individuals an opportunity to regularise their affairs. The period for filing for amnesty
relief ran up to 29 February 2004.
4. Fiscal policy
The liberalisation of South Africa's trade relations with the rest of the world was accompanied by
considerable changes in the management of public finances. At the beginning of the 1990s an
unsustainable fiscal situation had started to develop, and the deficit before borrowing and debt
repayment of the government reached 7,3 per cent of gross domestic product in the fiscal year
1992/93. Government expenditure continued to rise relative to domestic production, the tax burden
increased, the public sector made increasing demands on the domestic capital market, the ratio of
government's interest payments to gross domestic product rose steeply and government dissaving
increased to unacceptably high levels.
The post-apartheid South African government therefore placed considerable emphasis on restoring
fiscal stability. The economic strategy at first was to create stable macroeconomic conditions as a
necessary precondition for sustained growth and employment creation. It was believed that by
improving fiscal sustainability, poverty reduction and income redistribution would become attainable
objectives over the medium term. The expenditure restraint applied by the national and provincial
governments reduced the fiscal deficit before borrowing and debt repayment to 1,5 per cent of gross
domestic product in fiscal 2001/02.
This successful fiscal consolidation allowed the government to adopt a more expansionary fiscal policy
stance from fiscal 2001/02. More emphasis was placed on infrastructural development and social
upliftment than in the previous years. The government, however, continued to apply fiscal discipline
and despite a decline in the growth of tax revenue, was able to contain the main budget deficit to an
estimated 2,4 per cent of gross domestic product in fiscal 2003/04. Economic growth was primarily
promoted by microeconomic reforms to boost the supply side of the economy, rather than by
stimulating demand through rapid increases in expenditure and the lowering of taxes.
An important aspect of the budget reform was the adoption of the Medium-Term Expenditure
Framework in the fiscal year 1998/99 and the Public Finance Management Act of 1999. The
MediumTerm Expenditure Framework consists of three-year rolling expenditure and revenue projections for
the national and the provincial governments. This creates greater certainty and transparency to the
budgetary process. The Public Finance Management Act has enhanced the accountability of public
sector managers by emphasising disciplines such as regular financial reporting, sound internal
expenditure controls, improved accounting standards, performance monitoring and independent audit
and supervision systems.
The asset and liability management of government has also changed considerably over the past ten
years. After years of isolation, the South African government established itself again as a credible
borrower in the international capital markets. This is reflected in the upgraded credit ratings received
from international rating agencies since 1994 and the continued interest in investing in bond issues of
the national government. However the government has maintained its foreign debt well within
appropriate levels. At the end of December 2003 the foreign debt of the national government
amounted to only 6,0 per cent of gross domestic product.
In the domestic market the government's strategy has been aimed at reducing borrowing costs and
risk, managing maturity profiles, diversifying funding instruments, increasing transparency and building
credibility. The marketing of government debt through primary dealers was introduced in 1998,
followed by a debt consolidation programme in 2002. The funding instruments were also diversified
from fixed income bonds and treasury bills to inflation-linked bonds, variable rate bonds and retail
bonds. Moreover, considerable progress has been made in improving cash management through
investments in interest-bearing deposits.
As a result of all these measures the government has been able to reduce its net loan debt from a
peak of 48,1 per cent of gross domestic product in fiscal 1996/97 to 36,8 per cent in 2003/04. This not
only contributed to lower interest payments on total public debt, but also to generally lower long-term
yields in the South African capital market. The prudent measures applied by government have brought
about a decline in government net dissaving from the high level of 7,3 per cent of gross domestic
product in 1992 to 1,1 per cent in 2003.
5. Monetary policy
The more normalised relations with the rest of the world made it possible for the authorities to focus
monetary policy on the creation of a financial environment that would be conducive to the attainment
of the growth potential of the country. The objectives of monetary policy at the beginning of the 1990s
were to reduce the rate of inflation to the average rate of inflation in trading partner and competitor
countries; to manage the money creation process in such a way that an adequate, but not an
excessive amount of new money would be supplied to the system; to maintain positive real interest
rates; to increase the gold and other foreign reserves to a comfortable level and to develop a sound
financial infrastructure consisting of healthy financial institutions and financial markets.
In the 1990s the Reserve Bank also intervened heavily on its own initiative in the spot and forward
market to influence supply and demand in the foreign exchange market. These operations were
undertaken to smooth out large short-term fluctuations in the exchange rate, but it was explicitly stated
by the Bank that it did not target the level of the exchange rate. The extent to which the Bank
intervened in the foreign exchange market was clearly reflected in the changes in the net open
position in foreign reserves (NOFP), i.e. the net gold and other foreign reserves of the Bank less the
balance on its net oversold forward book. For example, on 30 September 1998 the NOFP reached a
peak of US$23,2 billion.
Despite this active intervention, large fluctuations occurred in the weighted average external value of
the rand, particularly during the second half of the 1990s in an environment of more liberalised
exchange controls. The monetary policy measures, however, achieved considerable success in
bringing the rate of inflation down. After inflation in the consumer price index had generally fluctuated
around a level of about 15 per cent in the late 1980s and the beginning of the 1990s it moved below
double digits in 1993 and declined to 5,2 per cent in 1999.
In February 2000 the government announced that South Africa had formally adopted an
inflationtargeting monetary policy framework to make monetary policy more transparent and accountable and
to promote a more co-ordinated approach with other policy measures. In the application of inflation
targeting in South Africa, it was decided to leave the external value of the rand to the market and not
to intervene in the foreign-exchange market to influence the exchange rate. It was realised that this
could lead to volatility in the exchange rate of the rand. Although the Bank would have preferred to
operate in an environment characterised by exchange rate stability, cognisance is taken of the fact
that fluctuations in the external value of the rand are unavoidable in the current international monetary
system of generally floating exchange rates. In these circumstances the authorities can only aim at
creating underlying economic conditions that are conducive to exchange rate stability.
Fluctuations in the exchange rate of the rand have nevertheless complicated the implementation of
monetary policy. For example in 2002 monetary policy was dominated by inflationary pressures arising
from a substantial depreciation in the external value of the rand in late 2001, combined with a sharp
rise in international oil prices as well as in domestic food prices. These external shocks were
responsible for a surge in the twelve-month rate of increase in the CPIX from a low of 5,8 per cent in
September 2001 to a peak of 11,3 per cent in October 2002. Restrictive monetary policy measures
and the subsequent recovery in the exchange rate of the rand then brought the rate of increase over
twelve months in the CPIX down to 4,4 per cent in March 2004.
With the adoption of the inflation targeting framework, it also became the stated objective of the
Reserve Bank to reduce the NOFP because of the negative effect that this position had on foreign
investments into South Africa and the assessment of domestic economic conditions of international
rating agencies. The NOFP was accordingly reduced from the peak oversold position of
US$23,2 billion at the end of September 1998 to an overbought position of US$0,9 billion at the end of
July 2003.
The Reserve Bank then shifted its focus to reducing its oversold forward book and to gradually
strengthen the official foreign exchange reserve position. As a result of the appreciation in the
exchange rate of the rand, the oversold forward book of the Reserve Bank amounting to US$4,1 billion
at the end of July 2003 and was quickly turned around to an overbought position of US$38 million at
the end of February 2004. The official foreign exchange reserves of the country was also increased
from US$7,6 billion at the end of December 2002 to US$10,0 billion at the end of April 2004. It is now
the objective of the Reserve Bank to increase its foreign reserves further in a gradual manner
whenever the underlying circumstances allow it to do so.
6. The financial sector
In the period of political and economic isolation during the 1980s the domestic financial sector
continued to grow rapidly. Many improvements were made to the regulatory framework such as the
creation of a uniform legal framework for all deposit-taking institutions; the establishment of
appropriate structures for the markets in new financial instruments; and the revision to rules governing
the marketing of equities, bonds and derivatives. Moreover, the authorities endeavoured to promote
proper risk management procedures and internationally accepted principles with the objective to
preserve the soundness of financial institutions.
The efforts made to maintain an effective and efficient financial sector were hampered by the lack of
co-operation with foreign regulators due to the political circumstances at that time. As a consequence,
some regulations and practices started to deviate from international best practices. With the
re-establishment of normal relations with the rest of the world in the 1990s, great efforts were made to
bring the rules and regulations on the activities of financial institutions in line with international norms
and standards.
From 1994 South African financial institutions started operating on an increasing scale in major
international financial centers as well as opening branches or subsidiaries in other African countries.
As part of this process, five large domestic companies transferred the primary listing of their stock to
foreign bourses. This change gave them greater access to capital resources at lower cost and
provided them with opportunities to promote their core business into other countries and regions. All
these companies maintained secondary listings on the JSE Securities Exchange South Africa (JSE),
and their market capitalisation on the JSE actually increased from R126 billion in 1997 to R471 billion
in 2003.
Over this same period foreign financial institutions were encouraged to conduct business in South
Africa by the creation of a level playing field between local and foreign service providers. The
regulatory authorities also actively encouraged the development of appropriate clearing, settlement,
ownership-transfer and market information systems and insisted on proper intra-market and
crossmarket risk management systems, including capital adequacy requirements for market participants.
The operations of the financial markets in South Africa were improved considerably to bring them in
line with international standards. In 1996 bond trading was shifted from the JSE to the Bond Exchange
of South Africa. This led to a substantial rise in the turnover in the secondary bond market from
R2 trillion in 1995 to nearly R12 trillion in 2003. Improvements to the JSE included the electronic
clearing and rolling contractual settlement, the dematerialisation of equity scrip and the implementation
of an electronic trading system. The value of shares traded on the JSE increased from R62 billion in
1994 to R752 billion in 2003.
An important further development since 1994 has been the importance attached to the provision of
access to finance and banking activities to small, medium and micro enterprises and underbanked
communities. This challenge has been accepted with due recognition of the regulatory objective of
achieving a high degree of economic efficiency and consumer protection in the economy. This
requires an approach that introduces changes to achieve greater participation in banking while
financial stability is maintained at the same time.
Developments in the regulatory framework of South Africa's financial markets during the past years
have been aimed at addressing empowerment issues. For this purpose, the financial sector has
developed a Financial Sector Black Economic Empowerment Charter to promote increased black
ownership of and access to financial institutions. This Charter, which was made public on 17 October
2003, sets out targets that will be pursued up to December 2014 regarding, among other things,
investment in human resource development; a procurement policy that favours accredited black
economic empowerment companies; improved delivery of and access to financial services to a greater
segment of the low-income population; the mobilisation of resources for empowerment financing;
increased direct black ownership at the holding company level; the encouragement of shareholder
activism in promoting the objectives of the charter; and directing a percentage of after-tax operating
profits to corporate social investment aimed at education, training and job creation.
7. Conclusion
The normalisation of relations with the rest of the world made it unnecessary to follow relatively
restrictive fiscal and monetary policies to maintain a surplus on the current account of South Africa's
balance of payments and created leeway for the promotion of economic growth. In the past ten years
a deficit was therefore recorded on the current account, but this deficit as a ratio of gross domestic
product remained low and averaged only 1 per cent per year. Over the same period a net financial
inflow was recorded from the rest of the world amounting to nearly R204 billion, compared with the net
financial outflow of about R45 billion from 1985 to 1993. As a result, the level of foreign investment in
South Africa amounted to R736 billion at the end of 2002.
These developments allowed the authorities to pursue more liberal policies while maintaining financial
stability, which contributed materially to a better growth performance of the domestic economy and the
improvement in the living standards of the population. South Africa's real economic growth doubled
from an average annual rate of 11⁄2 per cent during the 1980s to about 3 per cent between 1994 and
2003. In addition, the average growth in real gross national income per capita, an indicator of living
standards, improved from a negative figure of 1,1 per cent per annum during the 1980s to a positive
figure of 0,8 per cent between 1994 and 2003. Moreover, between 2000 and 2003 the average growth
in real gross national income per capita amounted to about 1,5 per cent.
The challenge is to further increase the growth performance of the domestic economy. The foundation
has been provided over the past ten years to make this achievable. So the future looks promising.
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