T T Mboweni: Global competitiveness - is South Africa ready?
Address by Mr T T Mboweni, Governor of the South African Reserve Bank, at the Black Management
Forum Conference 2000 in Gauteng on 13 October 2000.
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1. Introduction
Financial markets around the world are being integrated into a single global market and, whether we
like it or not, emerging and developing countries are being drawn into this process. The growing
economic interdependence of countries worldwide can be seen in the greater volume and variety of
cross-border transactions and in the faster and more widespread diffusion of technology.
Technological progress has improved transportation and communications, enhanced information
awareness and information processing, and set the stage for new products and innovations.
Although these markets still do not form a single global village, they are already so interdependent
that they have altered the environment in which the provision of financial services takes place. One of
the most important results of globalisation has been the huge upsurge in cross-border financial
transactions. This, in turn, has meant that shocks in one "national" market are quickly transmitted to
other "national" markets with the speed never thought of decades ago. The contagion effect of the
recent crisis in East Asia is a good example.
Another consequence of globalisation, is increased competition. Financial liberalisation, the removal
of controls and the breakdown of international barriers, make it possible for new entrants to participate
in markets which were previously closed to them. In view of the size of these enterprises and their
involvement in many countries in the world, they are usually well-placed to provide specialised
services to clients at relatively low costs. The increased competition makes new demands on old
established enterprises and they must either adapt or die.
2. Globalisation and financial institutions
Financial institutions all over the world have responded to these changes in different ways. Some
entered into strategic alliances with foreign or domestic enterprises. Others positioned themselves by
specialising in the provision of certain specific services. Yet others chose to consolidate and form
large groups. This approach led to takeovers and amalgamations of financial activity in new
companies that provide a broad spectrum of financial services to consumers.
In South Africa the financial system has also been undergoing major modernisation and strengthening.
The impetus for this change came after 1994 when foreign financial institutions began to participate
directly in the South African market. The policy followed by the authorities of gradually removing
exchange controls, opened up new opportunities for the diversification of investments. As a result,
foreign financial institutions set up large numbers of subsidiaries, branches or representative offices in
South Africa. At first the domestic financial institutions felt the impact of increased competition, but
they now seem to have adapted well to the changed circumstances and have introduced various
measures to improve their efficiency.
The depth, breadth and stature of South Africa's financial markets has been increased by a number of
important developments in recent years. The development of a eurorand bond market, the introduction
of primary dealers in bond auctions and the successful launching of a domestic medium-term note
programme deepened the South African bond market. Financial instruments have also been diversified
and aligned more closely with developments in international capital markets.
The Johannesburg Stock Exchange has been restructured to provide for electronic screen trading,
corporate and non-resident participation, negotiated commissions and dual capacity trading by
brokers. The stock exchange has also successfully forged links with other exchanges in Southern
Africa, and now shares with the Namibian Stock Exchange a system for trading, clearing and
settlement. Electronic clearing and settlement, the phased dematerialisation of shares and their
registration in a central securities depository, are currently being introduced. The objective is to reduce
settlement risk through delivery against payments linked to the National Payment, Clearing and
Settlement System.
It is important to realise that institutions that have greater international distribution and delivery
capacity can compete better on a global basis. While merger and acquisition activity continues to grow
rapidly in the world, the South African market has been relatively quiet in this regard since the market
crash of September 1998. Although the past years have seen high-profile listings on the London Stock
Exchange of South African Breweries, Old Mutual, Anglo American and Didata, there have been
relatively few new listings or rights issues on the Johannesburg Stock Exchange. Moderate growth in
share prices has tended to slow merger and acquisition activity, but cross-border acquisitions by South
African companies have entrenched South Africa as part of the global economy and highlighted the
need to be globally competitive.
The world of competitive global finance clearly favours players with a global scale and reach. This
means that financial institutions must have research facilities to keep them up to date with
international developments, they must have access to global markets and they must have products that
can be marketed internationally. For many South African institutions, this implies a complete change
in culture and in the behaviour of their staff, and probably also a realignment of their organisational
structures.
Financial institutions in a global environment will, in particular, rely heavily on information to target
potential clients, assess their needs and objectives, manage their portfolios, construct investment
strategies and allocate assets. In this regard the Internet has emerged as a key competitive arena for the
future of financial services. Web-based commerce has added new complexity and unpredictability to
the world of commercial and retail banking, mutual funds and brokers, back-office processors and
financial software providers.
Institutions that do not have a clear strategic focus will find it increasingly difficult to maintain their
positions as competition gets tougher. They will have to identify a specific focus for their business,
because it may become difficult to compete successfully in all the various fields and instruments.
Careful planning and organisation are needed in this integrated world to ensure that the needs of
clients are well served. Clients have become increasingly performance sensitive. This makes it
essential to monitor structures and products to keep performance inconsistencies to a minimum.
3. Globalisation and financial regulation
Greater global competitiveness also poses new challenges to financial regulation for ensuring financial
stability. The recent experience in a number of countries has clearly indicated that there is a real
danger of financial instability from globalised financial markets and large and volatile international
capital flows. The Asian crisis was magnified by bad loans, weak balance sheets and lack of
transparency in financial reporting. Research shows clearly that emerging markets with sound
financial systems are better able to manage the effects of international financial crises.
Partially in response to some negative effects of globalisation, several international institutions such as
the Basel Committee on Banking Supervision, the Bank for International Settlements (BIS), the World
Bank and the International Monetary Fund (IMF) have done studies on reforming the international
financial architecture.
The cooperative global efforts on reform have been concentrating on five major areas. The first area is
to make timely, reliable statistical data available to the market and the public, as well as information
about economic and financial policies, practices and decision-making. Important progress in this area
includes the establishment of the Special Data Dissemination Standard of the IMF and the release of
Public Information Notices following the conclusion of the Article IV consultation process between
the IMF and member countries. It is agreed that greater transparency will enhance the understanding
by the public of economic policy measures of government, strengthen credibility and make market
participants less uncertain in their decision-making.
The second area is the creation of internationally accepted practices. Key progress in this area includes
the development of the Code of Good Practices on Fiscal Transparency, the Code of Good Practices
on Transparency in Monetary and Financial Policies and guidelines concerning financial sector
soundness. Adherence to these international best practices and codes should help to ensure that
economies function properly.
The third area is the strengthening of the financial sector. The assumption is that banks and other
financial institutions need to improve internal practices, including risk assessment and risk
management. At the same time the official sector needs to upgrade the supervision and regulation of
the financial sector to keep pace with the modern global economy. To achieve these objectives, the
Basel Committee has developed the Core Principles for Effective Banking Supervision, while the
Committee on Payments and Settlement Systems has drawn up the Core Principles for Systemically
Important Payment Systems. Universal principles for insurance as well as security market regulation
have also been developed.
The fourth area of financial sector reform concerns involving the private sector in crisis prevention.
The involvement of the private sector should limit moral hazard, strengthen market discipline and
improve the repayment of loans.
The fifth area of reform concentrates on the prevention of systemic instability. Most of the
international best practices and codes have been established to minimise the effects that the insolvency
of a financial institution may have on other institutions. In addition, the IMF has created a Contingent
Credit Line facility as a precautionary defence for countries with strong economic policies. This
facility has been designed to prevent the balance of payments problems that could arise from
international financial contagion.
South Africa has been actively involved in discussions on the new international financial architecture.
We recently also participated in a Financial System Stability Assessment undertaken by the IMF and
the World Bank. The report on South Africa has not been published, but found that the South African
financial system is robust and that the financial sector's legal framework is impressive. The
assessment was further that South Africa is in broad compliance with recognised best practice in the
fields of security, insurance and banking regulation and that we are making substantial efforts to
ensure transparency. Despite this favourable assessment, we must nevertheless continue to strive for
sufficiently accountable, transparent and effective cooperation between the various agencies for the
smooth running of South Africa's financial markets. This should instil public confidence in the
financial system.
The Banks Act and the regulations governing the activities of the banks have been amended to bring
them into line with international developments. In addition, the Reserve Bank has established a
Financial Stability Unit (FSU) to focus on the overall stability of the financial sector and its
preparedness for global competition. One of the functions of the FSU is to keep abreast of
international developments as far as stability issues are concerned. The unit should ensure that the
South African financial system remains resilient in an environment of global competition. It has also
been created to ensure effective cooperation with the Financial Services Board.
The Reserve Bank's Financial Stability Unit will continuously assess developments in the domestic
financial system to ensure that we obtain early warnings of any signs of a potential crisis. The FSU
will also investigate the overall design of the financial regulatory regime, with special emphasis on
aspects of regulation that are difficult to implement. Its aim will be to strengthen structures, ensure
better management of risk in financial institutions and improve corporate governance. The work of the
unit will cut across a number of other areas, including the need for improved disclosure and how to
foster more effective cooperation among players in the financial system.
The establishment of the Financial Stability Unit further demonstrates that South Africa is increasingly
being equipped to become an international financial centre. A large part of the unit's work since its
establishment has consisted mostly of information gathering and follow-up work arising from the
agenda of the Financial Stability Forum of the Group of Seven industrial countries. The Financial
Stability Forum aims to bring together the regulators from the Group of Seven countries to exchange
ideas on how to achieve greater soundness in financial systems. It has produced guidelines on deposit
insurance and key standards for sound financial systems, as well as on implementing these guidelines
and standards. Although South Africa is not a member of the G7, representatives of our country have
participated in meetings of the Forum's working groups.
4. Globalisation and monetary policy
Globalisation and increased competitiveness have also created additional challenges for monetary
policy. The internationalisation of investment decisions has made South Africa more prone to volatile
capital movements. This was clearly illustrated by the behaviour of portfolio investments by
nonresidents in recent years. For example, the net purchases of South African bonds by non-residents
amounted to R16 billion in the first four months of 1998. This was followed by a reduction in their
holdings of R26 billion in the last eight months of 1998. From the beginning of 1999 until the end of
January 2000 they again became net investors in South African bonds to the amount of R16.5 billion.
Subsequently, from February to August, they again sold domestic bonds on a net basis totalling R12.5
billion.
In seeking to ensure stability in the overall balance of payments position of South Africa, volatile
capital movements are making it imperative for South Africa to reduce inflation. The pursuit of price
stability and the success achieved by many countries in bringing their inflation rates down to low
levels have left South Africa with no other alternative than to bring our inflation in step with that of
the rest of the world and to keep it there. If this is not achieved in the coming years, market
adjustments will take place to compensate for the inflation differential. Such adjustments could
include large disruptive capital outflows, a depreciation in the external value of the rand and high
interest rates.
The thrust of monetary policy in the new globalised financial environment must therefore be the
pursuance of price stability. Fortunately the Reserve Bank has already chosen to follow this course and
success in bringing inflation down is within our grasp. Unfortunately such a policy stance does not
provide unconditional protection against speculative capital outflows. The decisions of international
investors are based on international interest rates, exchange rates and such factors as political stability.
These factors are beyond the control of the central bank. The only approach that the Reserve Bank can
follow is to do its important bit for stability, growth and employment creation, and that means
establishing and maintaining financial stability.
However, the way in which this objective is pursued, is in the hands of the Reserve Bank. Recently an
inflation-targeting monetary policy framework was adopted for this purpose. Inflation targeting has
been used in many other countries with great success. With the adoption of this approach to monetary
policy in South Africa, the authorities attempted to create greater certainty about what monetary policy
wants to achieve. No one is left in the dark any longer. Everyone should know by now that the
Reserve Bank's ultimate objective is an annual average inflation target range of 3 to 6% for the year
2002. This new framework has helped to focus monetary policy, has promoted transparency and has
led to a clearer public accountability of the Reserve Bank.
Globalisation and increased international competition have made it important for the Reserve Bank to
adopt inflation targeting as its policy approach. International capital flows and liberalised financial
markets obscure the relationship between money supply, interest rates and inflation. In an integrated
world economy the money supply becomes a less reliable anchor for monetary policy, forcing the
authorities to take a different approach.
A fixed exchange rate system would also be a difficult monetary policy framework to pursue in a
world experiencing large and volatile capital movements. This was clear from the developments in
Mexico during the tequila crisis and in Thailand, Malaysia and Indonesia during 1998 when large
amounts of capital were withdrawn from emerging-market economies. However, some countries, such
as Hong Kong and Argentina, have applied a system of fixed exchange rates with some success, while
maintaining price stability. Their success was due to consistent monetary policies and well-regulated
financial systems. Flexible exchange rate regimes nevertheless seem to shelter countries more
effectively from the exogenous shocks that are typical of greater economic integration.
Trying to maintain an exchange rate target may be costly in terms of less activity in the domestic
economy. In an inflation-targeting framework, exchange rates are generally allowed to reflect the
supply of and demand for currency in foreign exchange markets. By allowing the exchange rate to be
flexible, interest rates become more stable and reversals in international capital flows do not disrupt
domestic economic activity as much. This does not mean that large exchange rate changes do not have
serious effects on production. Naturally they have a direct impact on the country's international
economic activity. Depending on the importance of the external sector they could also have a serious
impact on domestic production growth, job creation and inflation. However, large changes in interest
rates generally have a larger impact on domestic activity than exchange rate adjustments. The art of
central banking is to make these essential adjustments to the economy with the least harm to domestic
economic activity and job creation.
5. Conclusion
Globalisation and greater competition pose interesting challenges on a micro and macro level for
enterprises and the public authorities. Financial institutions and markets need to make many
adjustments to cope with this changed environment. Similarly, public authorities face new problems
without easy answers. These issues have led to a considerable effort by international organisations to
improve the world's financial architecture. At the same time, national public authorities had to apply
their minds to the policy approaches that the integrated world economy require. Financial institutions,
financial markets and the monetary authorities in South Africa have adapted in a flexible and
wellconsidered manner to changes in the world economy. We seem to have made the correct changes
under the circumstances, and these changes should contribute to sustainable high economic growth
and job creation in the medium to long term.