t t mboweni : how exposed is the rand to the potential outflow of hot money? remarks by mr t t mboweni, governor of the south african reserve bank, at the economist ’ s fourth business roundtable with the government of south africa, johannesburg, 21 november 2005. * * * it is difficult to quantify the exact potential of “ hot money ” outflows. undoubtely there is some of it in south africa, similar to any other high - yielding emerging - market country with a liquid currency market. some rough indications of potential “ hot money ” are the following : • the high turnover in the foreign exchange swaps market, with mainly non - resident clients as counterparties. • some build - up in authorised dealers ’ net forward commitments against rand • non - residents have increased their holdings of domestic bonds and equities by some r45 billion in the current year to date. south africa ’ s current account deficit is financed by ( predominantly ) foreign portfolio investments which can be easily reversed, while foreign direct investment is generally regarded as being more stable. however, two observations can be made in this regard : • the imf in march 2005 published a study entitled “ the composition of capital flows : is south africa different? ” this paper argued that zar stability and some changes to government policies could contribute to greater fdi. the paper noted, however, the sa attracted three times more foreign portfolio investment than any emerging - market country, as a percentage of gdp. equity flows to south africa remained well above levels in other developing and emerging markets. the composition of capital flows to south africa appears to be quite the opposite of other emerging markets. importantly, it is noted that south africa has attracted portfolio inflows more consistently than other countries. • there are indications that fdi might increase ( absa / barclays, vodafone ) as we sustain healthy growth rates, the exchange rate becomes more stable and exchange controls are relaxed further and eventually abolished. the rand has become more stable : zar volatility has declined over recent months – historical volatility down from as high as 30 per cent in the middle of 2003 to below 10 per cent in october 2005 behaviour of importers and exporters has become more rational – balances in cfc accounts stay fairly constant, whereas during 2001 and 2002, there tended to be build - ups in balances as exporters anticipated the zar to depreciate. the average holding period

##ary path we experienced in the 1970s and ’ 80s and which contributed to the recession in the early ’ 90s, which was the worst for over sixty years. a new direction in economic policy the 1970s and ’ 80s illustrate how a period of inflation creates an atmosphere of uncertainty and instability, with a speculative climate and “ short - termism ” in economic decisions. slowly but surely, production ’ s long - term conditions deteriorate. it was partly in the light of such experiences that swedish economic policy was realigned at the turn of the 1980s. since then, the focus on price stability has gained broad support in our society, including the political parties. however, in view of the severe economic problems in the early 1990s, with inflation expectations based on our historical record and a massive budget deficit, it took time for the new direction of economic policy to acquire credibility. this has been evident, for instance, in the periods of interest and exchange rate unrest. financial market trends particularly in the longer run can be regarded as an indicator of the prevailing degree of confidence in the determination and ability to conduct an economic policy that is consistent and oriented towards stability. with the free movement of capital and the globalisation of financial markets, economic policy decision - makers need to be highly disciplined. in the light of our experience since the policy realignment at the turn of the ’ 80s, this is a fact that is widely recognised today in sweden. turning the clock back would not be feasible. experience from other countries, where the policy realignment had already been made in the early 1980s, indicates that the creation of confidence in a low inflation regime takes time and a lot of hard work. but it also shows that after a while, such a process does yield its reward in the form of low interest rates, a stable currency and ultimately a favourable economic development. the price stability target following the move to a flexible exchange rate, monetary policy in sweden is directed at a quantified inflation target. in this it resembles the situation for monetary policy in australia, canada, new zealand and the united kingdom, where inflation targets are also used. in sweden the target is formulated as being to limit the increase in the consumer price index to 2 per cent. this target is to be assessed, not in terms of isolated twelve - month change figures but in a somewhat longer, annual, perspective. as monetary policy obviously cannot control price developments exactly, the target is accompanied by a tolerance interval of ±1 percentage point. this tolerance interval also serves