T T Mboweni: A broadbrush picture of recent financial and economic
developments in South Africa
Address by Mr T T Mboweni, Governor of the South African Reserve Bank, at the 18th Ordinary
General Meeting of shareholders, held on 29 August 2000.
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Introduction
The South African Reserve Bank has once again met the many challenges posed by the changing
domestic and international environment with great success during the past year. The Bank's resilience
was proven without any doubt in coping with such changes as the implementation of an
inflation-targeting monetary policy framework, the information technology and other problems arising
with the new millennium, and maintaining financial stability during very volatile conditions. The Bank
also succeeded in improving the efficiency and effectiveness of internal administrative procedures and
completed a plan to effect employment equity in all occupational categories.
The domestic economy also adapted very well to volatile international financial markets and reversals
in capital flows. Developments in the rest of the world had both positive and negative effects on South
Africa. On the one hand, the economic recovery in many parts of the world, together with continued
low inflation, led to higher international commodity prices and an increased demand for South
Africa's exports. On the other hand, certain inherent weaknesses in the world economy had a negative
impact on domestic financial markets and, eventually, also on the recovery in domestic production.
The external imbalances in the world caused a realignment of currencies, with the dollar becoming
notably stronger against the euro. Risks of sudden changes in market sentiment were exacerbated by
increases in share and property prices. Furthermore, international oil prices rose steeply when the
Organisation of Petroleum Exporting Countries (OPEC) and several other oil producers began to curb
production. Prices rose from about US$ 10 per barrel at the beginning of 1999 to levels in excess of
US$ 30 per barrel in the first half of 2000. This had a material impact on the import bill and prices in
South Africa. Despite these developments, South Africa's balance of payments remained inherently
healthy, and the foreign reserves of the country increased substantially.
Developments in some parts of sub-Saharan Africa unfortunately had an adverse influence on
international perceptions of South Africa. Socio-political conditions in a number of countries remained
unstable, and conflicts continued in parts of the continent. Events in Zimbabwe preceding the general
election affected the sentiment of many investors towards the region, and unjustifiably raised
questions regarding South Africa's economic prospects. The understanding by non-residents of the
underlying strength of the South African economy was further clouded by perceived structural
weaknesses in Africa, the slow pace of skills development, inadequate health facilities, the prevalence
of virulent diseases (including HIV/AIDS), and growing poverty and debt. These perceptions
disrupted domestic financial markets and real economic activity in South Africa during the first half of
2000.
A fundamentally sound balance of payments
The regional events, a shift of funds away from commodity-based countries to high-technology and
manufacturing-oriented economies, a rearrangement of portfolios as a result of the surging energy
prices, and higher international interest rates led to large net sales of domestic securities by
non-residents. After being net investors in South African bonds to the amount of R16.5 billion from
the beginning of 1999 until the end of January 2000, non-residents became net sellers of bonds
totalling R15.3 billion in the next six months up to the end of July 2000. Moreover, the net purchase of
shares by non-residents on the Johannesburg Stock Exchange fell from R40.6 billion in 1999 to only
R6.8 billion in the first seven months of 2000.
At first an inflow of other capital was able to offset the net sales of domestic bonds by non-residents.
In 1999 the net inflow of capital, including errors and unrecorded transactions, amounted to
R27.1 billion, and in the first quarter of 2000 to a still satisfactory R3.1 billion. However, in the
second quarter of 2000 a net outflow of capital was recorded, totalling R5.9 billion. The more
permanent inflow of capital in the form of direct investment by non-residents in South Africa
remained positive, but was offset by portfolio and trade-related outflows and a further accumulation of
foreign assets by residents. Non-resident direct investment in South Africa amounted to R13.3 billion
in the eighteen months until June 2000. These direct investment flows, as in other emerging-market
economies, can be boosted by large one-off privatisations.
Although the current account of the balance of payments moved into a deficit from the second quarter
of 1999, the deficit remained relatively small. Throughout 1999 and the first half of 2000 the deficit
did not exceed 1⁄2% of gross domestic product, and in the second quarter of 2000 a surplus of
R5.7 billion at a seasonally adjusted and annualised rate was recorded. This surplus was a remarkable
achievement taking into account the substantial increase in the country's oil import bill as well as
sharp increases in the volume of imports from the second half of 1999. The strong performance of the
current account can largely be attributed to the growth in merchandise exports. The favourable global
economic conditions, a rise in international commodity prices and a competitive exchange rate level in
South Africa, led to a considerable increase in both the value and volume of merchandise exports.
As a consequence of these developments on the current and financial accounts of the balance of
payments, total net gold and other foreign reserves increased by nearly R28 billion from the end of
1998 to March 2000, before declining by R4.4 billion in the next three months. At the end of
June 2000 the gross gold and other foreign reserves of the country nevertheless stood at R69.8 billion,
which is the equivalent of the value of approximately 15 weeks' imports of goods and services.
Moreover, the utilisation of foreign credit facilities to boost gross foreign reserves was reduced by
about R0.3 billion over the eighteen-month period until June 2000.
As could be expected, this fundamentally sound balance of payments situation at first resulted in
relatively stable conditions in the foreign exchange market. The nominal effective exchange rate of the
rand in fact increased by 0.6% from the end of 1998 to the end of 1999. At the beginning of 2000, the
external value of the rand began to depreciate in an environment of uncertainty in financial markets
arising from the strength of the United States dollar, increases in oil prices and concerns about
socio-political developments in sub-Saharan Africa. The weighted value of the rand declined by about
81⁄2% from the end of 1999 up to 30 May 2000.
Towards the end of May the behaviour of non-residents in the secondary bond market started to
change and the United States dollar weakened somewhat on international foreign exchange markets.
Net sales of South African bonds by non-residents of R17.3 billion in the four months ended
May 2000 changed to net purchases of R1.6 billion up to 22 August 2000. The nominal effective
exchange rate of the rand accordingly, on balance, increased again to a level on 23 August 2000 that
was about 5% lower than at the beginning of the year.
Buoyant but volatile financial markets
The depreciation of the rand was one of the factors contributing to a temporary reversal in the
downward movement of long-term interest rates and yields in South Africa during 2000. The monthly
average yield on long-term government bonds fell from 18.3% in September 1998 to a daily average
of 13.3% in mid-February 2000, influenced by the strength of the rand during that period, low
inflation, fiscal discipline and a positive assessment by international rating agencies of South Africa as
an investment destination.
Subsequently, bond yields reacted hesitantly to perceived changes in financial markets. In March
market sentiment deteriorated markedly owing to the weakness in the external value of the rand, rising
official interest rates in major financial centres and higher risk premiums on South African assets. The
daily average yield on long-term bonds shifted upwards to reach a peak of 15.2% on 10 May 2000,
before the return to more stable financial conditions reduced it to 13.7% on 22 August 2000. The
monthly average inflation-adjusted yield on long-term government bonds amounted to 5.5% in July
2000, compared with 10% in September 1998.
Trading activity in the secondary bond market was boosted by the uncertainty in international markets.
A record annual turnover of R8.8 trillion was recorded on the Bond Exchange of South Africa in 1999,
followed by R6.2 trillion in the first seven months of 2000, which was about one-quarter more than in
the corresponding period of the preceding year. In the primary bond market more active borrowing by
private-sector companies compensated for a decline in the net borrowing of the public sector.
The share market entered a long and difficult recovery phase after the financial crisis in 1998. The
daily average index of all classes of share prices fell by no less than 40% from the end of April 1998
to the end of August 1998, and then rose gradually to a new all-time high on 17 January 2000 of 10%
above its previous peak in April 1998. Rising interest rates, the depreciation of the rand and
corrections on major international bourses resulted in a decline in the daily average index of share
prices of 28% until 17 April 2000, when it began to recover again. On 22 August 2000 the daily
average index of all classes of share prices was nevertheless still 9% below its peak on
17 January 2000.
The strong recovery of share prices throughout 1999 supported trading activity on the Johannesburg
Stock Exchange. The value of shares traded in the secondary share market rose to R448 billion in
1999, which was 40% more than in 1998. Volatility in share prices fuelled trading activity further
during 2000. The value of shares traded in the first seven months of this year was 25% higher than in
the corresponding period of 1999.
In contrast to the unstable conditions in the bond and share markets, interest rates in the money market
declined sharply during 1999 and remained largely unchanged during the first seven months of 2000.
For example, the call rate on interbank funds declined from 17.75% at the end of 1998 to 9.5% on
31 January 2000 and remained at that level in the ensuing period. Similarly the three-month bankers'
acceptance rate moved down from 17.53% at the end of 1998 to 9.95% on 21 January 2000 and then
fluctuated in a narrow range of between 9.83% and 10.25% up to the end of July 2000. The stability in
the money market during the first seven months of 2000 can mainly be ascribed to the monetary policy
stance pursued by the Reserve Bank.
As a result of the changes in long-term and short-term interest rates, the relatively flat yield curve at
the beginning of 1999 assumed a steep positive slope over the next eighteen months. This reflected an
easing of the monetary policy stance and, in the first five months of 2000, higher long-term yields and
interest rates. From the end of May 2000 the differential between long-term and short-term yields
began to decline again.
A slowdown in economic recovery
The South African economy showed clear signs of a vigorous economic recovery during 1999. The
annualised quarter-to-quarter growth in the seasonally adjusted real gross domestic product accelerated
from 1% in the first quarter of 1999 to 31⁄2% in the fourth quarter. Moreover, the expansion in
economic activity became far more widespread in the course of the year. Whereas the agricultural and
tertiary sectors had been mainly responsible for the initial rally in production, increases in
manufacturing and other secondary sectors made a major contribution to output growth in the second
half of 1999.
Contrary to general expectations, the rate of expansion in the economy slowed down in the first half of
2000. Growth in real gross domestic product fell to 1% in the first quarter of 2000 and 11⁄2% in the
second quarter. To a large extent this was due to a decline in the output of the primary sectors,
reflecting poor climatic conditions and an over-supply of coal on international markets. Manufacturing
output was also affected by negative business sentiment related to the depreciation of the rand, the
withdrawal of portfolio capital by non-residents and socio-political developments in some sub-Saharan
African countries.
As a result of these developments, the inventory accumulation moderated in the second quarter of
2000. Domestic final demand continued to increase at relatively modest rates of between 1 and 21⁄2%
in the four quarters until June 2000. Over this period the government reduced its final consumption
expenditure significantly as part of its efforts to maintain fiscal discipline. Public-sector fixed capital
formation also declined throughout 1999 and the first half of 2000. This decrease, together with a
reduction in private-sector investment, reduced total real gross fixed capital formation by 7% in 1999.
However, the rate of decline in total investment levelled off towards the end of the year. Fixed capital
formation increased at an annualised rate of 11⁄2% in the first half of 2000 when private companies
apparently started to increase capital spending in anticipation of stronger growth in domestic and
export demand.
In sharp contrast to the developments in other expenditure aggregates, real household consumption
expenditure rose steeply over the twelve months up to June 2000. Consumer confidence was high
owing to increases in personal disposable income, a fall in bank lending rates and a lowering of
effective income-tax rates. Despite this optimism, consumers avoided the use of excessive debt
accumulation in financing consumption. Household debt as a ratio of disposable income declined from
nearly 60% in the first quarter of 1999 to 57% in the second quarter of 2000. The reluctance of
consumers to incur debt stems mainly from the volatility in real interest rates over the past two years.
The modest economic growth over the past eighteen months did not lead to meaningful employment
creation. Further reductions were recorded in employment in the non-agricultural private sector as well
as in the public sector, which were neutralised by increases in the informal sector. At the same time,
the growth in nominal unit labour costs slowed down significantly because of lower increases in the
labour remuneration per worker and a rise in productivity. The rate of increase in nominal unit labour
costs declined from 8.9% in 1998 to 3.2% in 1999 and only 0.5% in the first quarter of 2000,
compared with the same period in the preceding year.
Discipline in fiscal policy
Disciplined fiscal policies and efficient public administration procedures brought the public-sector
borrowing requirement down from R25.6 billion in fiscal 1998/99 to R10.9 billion in fiscal 1999/2000.
Over the past five years the public-sector borrowing requirement has been reduced from 5.8% of gross
domestic product in fiscal 1994/95 to only 1.3% in fiscal 1999/2000. The further decline in the
borrowing requirement of the public sector in the past fiscal year can be attributed to substantial
improvements in the financial position of the national government, provincial governments and the
non-financial public enterprises and corporations.
A decline in investment spending by public enterprises and corporations was responsible for
approximately 25% of the reduction in the public-sector borrowing requirement. The remaining 75%
saving in the borrowing requirement was largely due to the considerable restraint with expenditure
allocations exercised by the national government and more efficient procedures for collecting income
and other taxes.
It is important to note, however, that part of the curtailment in expenditure over the past five years
may have been achieved at the cost of the development and maintenance of the economic and social
infrastructure of the country. There is a delicate balance between containing expenditure and
maintaining the infrastructure required for economic development.
Greater price stability
The effective fiscal, monetary and other policy measures pursued by the authorities, in conjunction
with lower international inflation, succeeded in creating greater price stability in South Africa. In 1998
and 1999 the rate of increase in the consumer price index excluding mortgage interest costs (CPIX)
averaged 7% per year. This rate of increase can be compared with inflation rates fluctuating around
15% in the 1980s and early 1990s.
During 1999 the twelve-month growth rate in the CPIX slowed down from 7.3% in March 1999 to
6.5% in October, but then accelerated to 8.0% in July 2000. The rise in inflation was largely due to
shocks such as higher international oil prices, floods and volatile financial markets. When the effects
of the price rise in petrol, diesel and food are omitted from the CPIX, the rate of increase over twelve
months in other consumer prices fell from 6.8% in October 1999 to 6.7% in July 2000.
The year-on-year increase in the all-goods production price index accelerated from a low rate of 2.3%
in March 1998 to 10.1% in April 2000. This rate of increase, which normally precedes changes in
consumer prices, slowed down to 8.6% in July 2000 in line with the appreciation in the external value
of the rand.
Recent developments in monetary aggregates bode well for the inflationary outlook, provided that the
direct impact of external shocks wears off and that the secondary effects of the increase in oil prices
can be contained. The level of the broadly defined money supply (M3) at the end of June 2000 was
virtually the same as at the end of 1999, whereas M3 had increased at an annualised rate of nearly 19%
in the second half of 1999. Moreover, the decline in money supply growth was largely concentrated in
cheque and transmission deposits and coin and banknotes, ie in that part of M3 reflecting the
transaction demand for money.
Growth in bank credit extension, which had moved to single-digit levels in the second half of 1999,
remained below 10% in the first half of 2000. The demand for overdraft facilities was buoyant in the
first six months of 2000. Most of the overdrafts were utilised by the corporate sector to finance
working capital. Mortgage advances, instalment sale credit and leasing finance also picked up with the
revival in the real-estate market and in expenditure on durable goods.
Monetary policy in a volatile environment
The volatility in financial markets had a significant influence on monetary policy during the past year.
At first, evidence that the emerging-market crisis of 1997/98 was abating made it possible to relax a
very stringent monetary policy stance. The repurchase rate of the Reserve Bank was allowed to decline
from a peak of 21.85% in early October 1998 to approximately 12% on 24 November 1999. The
Monetary Policy Committee then announced that the repurchase rate would be fixed at this level
temporarily because of possible disruptions in liquidity relating to the computer problems expected to
arise at the year-end date change. The marginal lending rate of the Bank, ie the rate on a standby
facility to bridge the unforeseen liquidity needs of banks, was also reduced from 15 to 5 percentage
points above the repurchase rate.
In addition to these measures, the Reserve Bank deliberately eased liquidity conditions in the money
market during the last four months of 1999 to allay fears about the millennium change. When it
became apparent that no serious Y2K problems would be experienced, the Reserve Bank reinforced
the reserve dependency of banks on central bank funding. Bank liquidity was drained by increasing
reverse-repurchase transactions, issuing Reserve Bank debentures and by concluding foreign exchange
swaps with banks. From 14 January 2000 the Bank began to resume a variable-rate auction in
accordance with the agreed signalling procedures with banks, and indicated that changes in short-term
interest rates at that stage warranted an immediate reduction in the repurchase rate by a further
25 basis points.
From the middle of January 2000 the Monetary Policy Committee indicated that the repurchase rate
should remain at or around a level of 11.75%. The interpretation of this announcement by the banks
was that the Reserve Bank wished to keep the repo rate fixed at this level. They accordingly tendered
at the daily auctions at exactly this rate. While the Reserve Bank's objective was to achieve stable
money-market interest rates in volatile financial conditions, this did not preclude moderate variations
in the repo rate around the 11.75% level.
Stable money-market interest rates were regarded as desirable to restrain volatility. In the
circumstances, a rise in rates would have failed to counter the effects of the supply-side shocks on
domestic prices. Moreover, a number of other factors indicated that the upside risks for inflation
would probably be short-lived. Developments such as modest increases in nominal unit labour costs,
fiscal discipline, excess production capacity, low growth in money supply and bank credit extension
and a prudent monetary policy stance, pointed to a favourable long-term inflation outlook.
In a further attempt to create greater certainty about the ultimate objective of monetary policy, an
inflation-targeting monetary policy framework was formally adopted in South Africa as part of overall
economic policy. This was announced in the Budget Speech by the Minister of Finance on
23 February 2000, with an annual average inflation target range of 3 to 6% for the year 2002 being set.
The new framework provides an anchor for the ultimate objective of monetary policy. It helps to focus
monetary policy, increases transparency and leads to a clear accountability of the Reserve Bank to the
citizens of the country. The successful application of inflation targeting, however, will depend on a
concerted, cooperative effort by the key stakeholders, such as government, labour and business.
The inflation target was specified as a range to allow the Bank some discretion in taking decisions on
the monetary policy stance. The target is calculated as the average annual increase in the overall
consumer price index excluding mortgage interest costs in metropolitan and other urban areas for the
year 2002. A variant of the headline inflation rate was used, because the overall consumer price index
is affected directly by changes in the Reserve Bank's repurchase rate. By including price changes in
metropolitan as well as other urban areas, the most comprehensive price index available in South
Africa has been targeted. The year 2002 was selected because of the long lags of between 18 and
24 months before changes in short-term interest rates have an impact on inflation.
The adoption of an inflation-targeting monetary policy framework for South Africa has certain
important implications. Firstly, the numerical inflation target becomes the overriding objective of
monetary policy. Monetary policy operational procedures are concerned overwhelmingly with the
attainment of this objective. The objective of the framework is, after all, to achieve the target.
However, this does not mean that the central bank is left without any discretion. A rigorously applied
rule would deprive the central bank of its ability to deal with unusual or unforeseen circumstances.
Secondly, the pursuit of inflation targets does not mean that the Reserve Bank is not concerned about
the achievement of sustained high economic growth and employment creation. Monetary policy
cannot contribute directly to sustainable economic growth and employment creation. However, by
creating a stable financial environment, monetary policy fulfils an important precondition for the
attainment of economic development. Empirical evidence has shown that high and variable inflation is
bad for economic growth and that price stability is beneficial to a country's performance.
Thirdly, to be successful, inflation targeting requires nominal exchange rate flexibility. Trying to
maintain an inappropriate exchange rate may be costly in terms of domestic economic activity.
Unrealistically valued currencies may lead to large international capital flows with serious disruptive
effects on the domestic economy. In an inflation-targeting monetary policy framework, exchange rates
should essentially reflect the domestic monetary and fiscal policies of the authorities and be
determined by the supply of and demand for currency in foreign exchange markets. This will result in
fluctuations in the exchange rate of the rand, but should at the same time promote domestic economic
stability. The Reserve Bank nevertheless takes cognisance of the second-round impact of exchange
rate movements on the inflation rate.
Fourthly, inflation targeting is a forward-looking approach. Monetary policy is based on the likely
path of inflation. In any monetary policy framework a central bank has to decide how its current policy
stance will affect future price movements. The difference between inflation targeting and other
frameworks is that inflation targeting makes forecasting explicit and more transparent.
For this purpose econometric models are applied and changes in economic circumstances are carefully
analysed to determine the inflation outlook. With the assistance of a number of other central banks,
considerable effort has been made to improve the forecasting capacity of the Reserve Bank. A number
of small and simplified models have been developed to forecast inflation. In addition, the Bank has
initiated an inflation expectations survey to determine the expected level of inflation.
Econometric modelling is only one of the tools used to determine the monetary policy stance.
However, the real world cannot be encapsulated adequately by an integrated system of mathematical
equations. Econometric models over-simplify actual economic relations. Determining monetary policy
requires a much more detailed analysis of factors that may have an impact on inflation. Value
judgements are unavoidable. The determination of monetary policy in an inflation-targeting
framework therefore remains an art and does not become an exact science.
Finally, inflation targeting increases the transparency and accountability of monetary policy because
the objective of price stability is expressed as a numerical target to be achieved over a specific period.
The public announcement of explicit targets enhances the understanding of the policy objectives.
Good governance calls for the Bank to be accountable, particularly in view of its operational
independence in achieving the targets.
In order to further facilitate an understanding of monetary policy, the policy stance is explained in a
statement issued after every meeting of the Monetary Policy Committee, at Monetary Policy Forums
in major regional centres, in various publications of the Bank and in speeches and presentations to the
public and the Parliamentary Portfolio Committee on Finance. The Reserve Bank also intends to
publish a six-monthly Monetary Policy Review to describe in greater detail the policies pursued and
instruments applied.
However, the Reserve Bank does not intend to publish the minutes of meetings of the Monetary Policy
Committee. The statement published after every meeting provides a good reflection of considerations
taken into account at the meeting. The Bank also does not intend to publish the structure of its
econometric models at this stage because the functioning of these models needs to be evaluated over a
long period of time. Disclosure of the models could create uncertainty about policy decisions. Once
the models have been validated, the Bank will consider publishing them.
At present it is also the objective of the Bank to reduce its net oversold position in foreign currency
whenever circumstances allow. The foreign currency exposure of the Reserve Bank adversely affected
market sentiment and has increased the volatility in the exchange rate of the rand and in other financial
aggregates. Recognising this, a policy of gradually reducing the net open position in foreign currency
has been followed. By buying dollars in the market, the net open position in foreign currency of the
Bank was reduced from US$ 23.2 billion at the end of September 1998 to US$ 9.9 billion at the end of
July 2000. The reduction of the net open position in foreign currency to zero will remove one of the
risk factors in the economy.
The reduction in the net open foreign position has had the added advantage of reducing the foreign
currency exposure of the national government as a ratio of government debt from nearly 43% at the
end of September 1998 to approximately 24% at the end of July 2000. The comparable ratio for South
Africa's peer group was some 46% at the end of December 1999. Were the Bank to succeed in
reducing the net open foreign position to zero, the foreign currency exposure of the government as a
ratio of government debt, at current levels, would amount to only 6%. This low currency exposure
makes it easier to borrow funds abroad.
Maintaining stability in the financial sector
A stable financial environment requires not only low inflation, but also a sound financial sector. This
involves stability in the financial markets where transactions can take place at prices reflecting
demand and supply forces, and with healthy financial institutions capable of meeting contractual
obligations without interruption or outside assistance.
Stability in the financial sector and price stability are inextricably interrelated. Failure to maintain one
form of stability creates an uncertain operating environment for the other, with causality running in
both directions. A lack of price stability could lead to rapid growth in credit extension and higher
interest rates, with the danger that borrowers could default on loan commitments. Bank failures may
potentially be contagious, which would render monetary instruments ineffective and cause higher
inflation. By contrast, stability in the financial sector enhances financial intermediation, improves the
allocation of real resources and provides an environment conducive to the implementation of monetary
policy.
South Africa is fortunate to have a well-developed and sound financial system. Moreover, the
domestic banking sector proved remarkably resilient during the global financial turmoil of 1997/98. In
the mature South African financial market with a moderate level of private indebtedness and a good
regulatory and legal framework, the major banks were able to cope efficiently with the effects of high
interest rates and exchange rate volatility.
In the past financial year, thorough preparations to avoid the possible impact of the transition to the
year 2000 ensured that normal operations were maintained. Some of the smaller banks experienced
temporary liquidity problems which were largely solved by allowing the affected banks to discount
their cash reserves and statutory liquid-asset portfolios. The funding and other corrective measures
enabled the affected banks to restore liquidity positions during the first quarter of 2000.
South African banks are well run with sophisticated risk-management systems and
corporate-governance structures. They are also well capitalised and had an average risk-weighted
capital-adequacy ratio of 12.5% at the end of June 2000, compared with the required minimum ratio of
8% stipulated in the Basel Capital Accord. More than 60% of the banks had a capital-adequacy ratio of
at least 15% at the end of June 2000.
Although non-performing loans have increased since the international financial crisis, South African
banks have made greater provision for bad and doubtful debts. As a ratio of total loans and advances,
gross overdues in the banking sector came to only 4.6% in the second quarter of 2000. Provision for
doubtful debts amounted to about 60% of total overdues in the same period, which is far more
conservative than the international norm of 40%. However, there are signs that the profitability of the
banking sector is declining somewhat. Lower income combined with higher operating expenses
resulted in marginally lower returns on assets and equity in the first half of 2000.
The excess