words, a real depreciation is supposed to be positive for growth. capital flows are multidimensional. some are driven by interest rate differentials, and the current global low interest rate environment makes emerging markets a desirable portfolio investment destination. these inflows have given support to the rand over the past few years. but periodic reversals of these flows, for example during global risk - off scenarios and risks of interest rate increases in the us have impacted negatively on the rand. portfolio inflows into equity markets are growth sensitive, and this explains why non - residents have been net sellers of south african shares in recent months. to some extent, the rand has followed the pattern of commodity - producing emerging market economies over the past few years in response to changes in terms of trade and the pattern of global capital flows. however, there have been important divergences relating to domestic idiosyncratic events which have resulted in heightened perceived political risk, and reflected in the weaker exchange rate. the increased risk premium is often associated with falling business confidence. the resulting exchange rate depreciation is consequently unlikely to be a big boost to investment and exports. rather, it will reflect weakening institutions. the adjustment is then unlikely to come about through increased exports, but through import compression, in the form lower investment and consumption expenditure. a weakening currency in the face of heightened political risk is therefore not a sign of increased global competitiveness, and is unlikely to be accompanied by higher growth. currently, south africa remains under threat of a possible downgrade from the rating agencies to sub - investment grade. one of the explicit factors contributing to some of the agencies maintaining our investment grade rate in the past few months has been the strength of some of our critical institutions. there is no doubt that should a downgrade transpire, it will be reflected in the exchange rate ( to the extent that it is not already reflected ). this will not be a sign of increased competitiveness, rather an adjustment to a deterioration in our competitive standing globally as an investment destination. the impact of strong institutions on our global competitiveness cannot be underestimated. the financial stability mandate aside from price stability, the bank has now also been given an explicit mandate to oversee financial stability as envisaged in the financial sector regulation bill ( fsrb ), which is currently before parliament. the bill defines financial stability in two important ways. firstly, it is the ability of financial institutions to provide products and services within the confines of the law

structural reforms. this inability to do so creates unreasonable expectations for monetary policy to achieve objectives that it is not competent to deliver. ultimately it could lead to an undermining of central bank credibility and institutional strength, even in those areas where it is best suited to operate. the exchange rate and competitiveness as i mentioned earlier, when people think about global competitiveness, the exchange rate immediately comes to mind. central banks talk about the exchange rate and global competitiveness, we are referring to the real exchange rate, or the nominal exchange rate adjusted for inflation differentials between south africa and its trading partners. a depreciation only improves competitiveness if it is not eroded by higher inflation. in other words, if it is a real depreciation. so the bank ’ s contribution to keeping inflation low is relevant in this respect. our constitutional mandate to protect the value of the currency is often interpreted as a mandate to keep the nominal exchange rate stable. in the absence of other shocks, the exchange rate should remain stable if our inflation rate is the same as that of our trading partners. but assuming our inflation rate is higher and we attempt to maintain a stable exchange rate ( and assuming that we have the means to do that ), our real exchange rate will in fact be appreciating. in other words, we will be losing competitiveness, as the cost of producing goods domestically will have increased relative to our competitors. this persistent overvaluation of the currency will not be sustainable. since the beginning of 2011, the real effective exchange rate has depreciated by 26, 8 per cent, in contrast to the nominal effective depreciation of 41, 9 per cent. so on this measure we are more competitive, but we have not seen a strong adjustment to this, as evident in the persistent current account deficit. there are a number of possible explanations but i will highlight a few points. it is important to understand what the key drivers of the depreciation have been. while there are a whole range of factors that impact the rand on a day to day basis, terms of trade changes and capital flows have been among the key underlying drivers or determinants. falling commodity prices since 2011 have been an important factor in the weakening of the rand. this does not necessarily provide an impetus for increased production of commodities, but rather it shields the rand value of mining output. it does make non - mining exports more attractive, and that is how the adjustment is supposed to work. in other