François Groepe: The South African economy, policy mandates and
international central bank cooperation
Address by Mr François Groepe, Deputy Governor of the South African Reserve Bank, at the
Tenth Annual International Operational Risk Working Group (IORWG) Conference, Cape
Town, 22 April 2015.
* * *
Introduction
Good evening ladies and gentlemen. I wish to extend a warm and hearty African welcome to
you and I hope that you will thoroughly enjoy tonight's gala dinner.
It is my privilege and honour to host this gala dinner on the occasion of the Tenth Annual
International Operational Risk Working Group (IORWG) Conference. I wish to personally
thank the co-chairperson, Ms Donna Brenner, for supporting the South African Reserve
Bank's (SARB) bid to host this important conference in this wonderful city. I, furthermore,
wish to express my sincerest gratitude to all the delegates and their spouses, many who
have travelled from abroad for gracing us with your presence and contributing to the debates
and the discussions.
The SARB has enjoyed a long and beneficial relationship with the IORWG and all its member
central banks and it is my wish that this conference will further cement the strong and
mutually beneficial bi- and multi-lateral relationships that have been built over many years.
Before we proceed with dinner, I would like to share with you some thoughts about the South
African economy and our policy mandates and the importance of international cooperation
among central banks.
South Africa and the global economy
South Africa is a small open economy with a population of 54 million and a GDP of some
USD 350 billion. This equates to a GDP per capita of USD 5 900 and USD 12 100 on a
purchasing power parity basis. The tertiary sector has expanded rapidly over the last decade
or two and now accounts for nearly two thirds of the economy. One of the huge challenges
the country faces is structural unemployment, which is around 24 per cent with youth
unemployment as high as 50 per cent. In order for the country to keep unemployment levels
stable, the economy needs to grow at approximately 3 per cent per annum.
The country's economic recovery after the global financial crisis was initially broadly in line
with the global recovery with economic growth registering at 3,0 per cent and 3,2 per cent in
2010 and 2011, respectively. Since 2011, the economic recovery has slowed with growth
slowing to 2,2 per cent and 1,5 per cent in 2013 and 2014, respectively.
Growth for 2015 is projected at 2,2 per cent and is notably lower than the pre-crisis growth
rates. In recent years the lower growth rates was attributable to significant supply side
constraints and disruptions. The most recent electricity load shedding has become a more
pronounced drag on real output and unfortunately is likely to be a binding constraint over the
short to medium term.
South Africa's current account deficit has improved slightly from 5,8 per cent of GDP in 2013
to 5,4 per cent in 2014. Although this is often described as a vulnerability, it is somewhat
mitigated by the fact that the public debt to GDP ratio is manageable at approximately 45 per
cent, a fairly small percentage of the public debt is foreign denominated and lastly, the
country's net international investment position, (i.e. external financial assets minus liabilities)
stood at only -R438 billion in the final quarter of 2014.
The South African Government released the National Development Plan some two years
ago. This plan offers a long-term perspective on how to eliminate poverty and reduce
inequality by 2030 by, inter alia, growing an inclusive economy, building capabilities, and
enhancing the capacity of the state. Should significant aspects of this plan be successfully
implemented over the next decade or so, it will contribute positively towards lifting the
potential growth rate of the economy and causing unemployment and poverty levels to drop
in a meaningful way.
The slow growth rate referred to above, however, has not only been impacted by domestic
idiosyncratic factors only. Certain exogenous factors, such as the moderation in emerging
market economies growth rates, weaker external demand and lower commodity prices have
certainly contributed to the more pedestrian growth outcomes.
The unprecedented extent of unconventional monetary policy adopted by the advanced
economies and the subsequent commencement by the US on the path towards monetary
policy normalisation has led to significant spill-over effects. This is as a result of the extent of
global trade and the integration of financial markets and has contributed to the high levels of
volatility seen in the foreign exchange markets. The rand/dollar exchange rate has depreciated
by 4,96 per cent since the beginning of this year, but has appreciated by 7,25 per cent against
the euro and hence, on a trade weighted basis the rand had been relatively stable.
The volatility in the foreign currency exchange markets is likely to persist and will be
amplified should the timing of the so-called lift-off differ from market expectations, or a Grexit
occur. The emerging market economies are likely to be affected significantly by these
developments and countries with weak macro-economic fundamentals and indicators in
particular are likely to be most vulnerable.
The role of the SARB in the economy
The Constitution mandates the SARB to protect the value of the currency in the interest of
balanced and sustainable economic growth. We strive to achieve this objective within a
flexible inflation targeting framework as it is widely believed that price stability is a necessary
pre-condition for balanced and sustainable growth. The global financial crisis has, however,
demonstrated that price stability in, and of its own, is not sufficient to ensure that financial
stability is achieved.
This resulted in the Bank's mandate of price stability being expanded to include the
additional responsibility of overseeing and maintaining the stability of the broader financial
system. South Africa has opted to shift to a Twin Peaks model of financial sector regulation
which represents a move away from a fragmented regulatory approach (based on the
institution or activity) towards a regulatory and supervision model based on objectives. In
terms of proposed legislation, the Bank will house the Prudential Authority, which would
supervise the safety and soundness of banks, insurance companies and other financial
institutions, while the market conduct authority would supervise the way in which financial
services firms conduct themselves and treat their customers.
These reform forms part of the current broader overhaul of the global regulatory system,
which aims to address the too-big-to-fail problem of systemically important financial
institutions, building resilient financial institutions, reducing the opacity of over-the-counter
derivatives markets, mitigating the impact of shadow banking on financial stability, enhancing
financial benchmark transparency, and promoting the convergence of accounting standards.
The importance of international dialogue and ERM frameworks for central banks
The increased connectedness of the world, within which we operate, has necessitated closer
cooperation and coordination within the central bank community. The need for this has once
again been highlighted by the global financial crisis and the subsequent attempts to not only
restart the global economy but also to undertake an ambitious global regulatory reform
agenda in order to address and avoid the excesses and imbalances that led to it.
This illustrates the importance of collaboration between central banks. Without strong
international leadership and active collaboration it would not have been possible to progress
the overhaul of the global regulatory system to the extent that had been achieved.
The expanded mandate of central banks may in the longer-term lead to demands for greater
accountability and potentially attempts to curtail their independence. It is, therefore, important
that central banks are proactive in further improving accountability and transparency and to
ensure that their governance standards are beyond reproach. Central to such a governance
framework is the risk management policy framework.
This conference provides a platform for collaborating, sharing experiences and thoughts and
addressing common challenges together. It provides a useful opportunity to leverage and
learn from the experiences of how best to ensure that the risks, that inhibit achievement of
our objectives, are properly identified and mitigated.
It is generally accepted that central banks were late movers into the area of true Enterprise
Risk Management (ERM), due to the strong emphasis on financial risk management. It soon
became apparent that this is not sufficient and that operational risk management had to be
brought into sharper focus. It is important that central banks move to the next phase which
would require a greater appreciation of the importance of integrating all risk management
across a central bank's operations in the mould of a true ERM approach. This will assist in
ensuring that strategic risks, policy risks, and reputational risks are holistically integrated with
operational risk management.
The IORWG has played, and I believe will continue to play, a vital role facilitating this
broadening of the risk management frameworks within the broader central bank community. I
have further been encouraged by the fact that many of you are appreciative of the need to
move in that direction. There is no doubt that there may be some resistance to the expansion
of the risk management frameworks to cover policy risks within central banks.
I am, therefore, proud that I am able to share with you that South Africa has recently
expanded its risk management framework to cover policy risks and we have completed an
assessment of monetary policy risks. We further envisage incorporating financial stability
policy into our risk management framework once we have implemented the proposed
financial regulatory architecture reforms.
In the light of what I have said, I hope you would forgive me for being so bold as to suggest
that the IORWG may wish to consider changing its name to better reflect this structural shift.
It may choose to consider replacing the word OPERATIONAL with ORGANISATIONAL in the
IORWG acronym.
Conclusion
Central banks have many functions and operations that underlie their primary goals.
Enterprise risk management is a key assurance activity that allows central banks to pursue
their mandates effectively and efficiently. This is vital given the escalation in the challenges
that they face such as the growing threat of concerted cyber-attacks to name but a single
example.
I, therefore, challenge you to take forward the many themes covered here this week and to
continue to collaborate in the cooperative spirit you have shown in the past to find ways to
meet the threats facing us all. Your institutions, your countries, your fellow countrymen, in
fact the whole world will thank you for assisting your institutions in realising their mandates in
support of economic growth, keeping prices stable, achieving and maintaining financial
stability and keeping unemployment levels in check.
Thank you for your attention, and enjoy the rest of the evening with us in this lovely setting.