gill marcus : the outlook for the south african economy in a challenging global environment address by ms gill marcus, governor of the south african reserve bank, to the distinguished speakers seminar, european economics and financial centre, london, 8 april 2014. * * * thank you for the opportunity to address you this afternoon. today ’ s discussion takes place at a time when the uk is one of the advanced economies that is showing signs of sustained recovery from the global financial crisis. this is good news not just for the uk, but also for south africa, which still has strong trade and investment links with your country. however, after nearly seven grueling years, we need to recognise that the global financial crisis is not yet over. rather, we have entered a new phase, one which is moving in the right direction, but one that is no less uncertain and risky than previous phases, and which poses new challenges for emerging economies in particular. the unwinding of the extraordinary monetary policy actions of the past by the us fed is taking us all into unknown territory, and there is no history or precedent to guide us. emerging economies had to deal with the spillover effects of monetary accommodation in the advanced economies, and the challenges to be faced by their reversal will be no less daunting. however, while the adjustment will be difficult, i believe that emerging economies in general, including south africa, are more resilient and better equipped to respond to such challenges than was the case in the past. one of the consequences of the unconventional monetary policies adopted in a number of the advanced economies in response to the global financial crisis was a significant change in the pattern of global capital flows. as the search for yield became more intense, emerging economies had to contend with large capital inflows. although these flows presented opportunities, they also brought challenges in the form of appreciating exchange rates and lower interest rates, which had the potential to cause a buildup of macroeconomic imbalances, including, in some instances, excessive credit extension, asset price bubbles and widening fiscal and current account deficits. the appreciating currencies also made the products of these economies less competitive, with significant consequences for domestic manufacturing, for instance. the announcement by the us fed in may last year that a reduction of asset purchases was likely to commence at some stage later in the year had a marked impact on these global capital flows, amid initial uncertainty about the timing and quantum of the tapering. the widely expected

towards foreign financial markets and eventually towards foreign relocation, then that could be activity lost to new zealand. new zealanders ’ unwillingness to provide equity capital has been an incentive for increased direct foreign ownership. in many cases this has been desirable, even inevitable, for expanding companies. one can see a natural progression whereby some new zealand companies gradually outgrow the technical and market limitations of this country, and as they expand into bigger markets, take on more of the ownership attributes of international firms. but if that happens “ prematurely ”, there is an opportunity benefit foregone for new zealand. new zealand ’ s liberal attitude to foreign ownership has brought us many important advantages. we have enjoyed access to the world ’ s capital, to best practice international technologies, to specialised business skills, and to marketing networks. these have brought higher productivity, employment opportunities, and have contributed to our higher growth rates. this also has to do with the much discussed cultural tendency of some new zealand entrepreneurs to grow their business to sales levels of some tens of millions, then exit for the “ bach, boat and bmw ” semi - retirement subculture, leaving overseas investors to expand the business further and develop its full value internationally. gdp is a measure of what is produced in new zealand, while national income ( which used to be called gnp ) measures the fruits of production that actually accrue to new zealand residents. in 2005, national income was around $ 10 billion lower than gdp, as a significant part of gdp accrued to the overseas owners of new zealand - based companies. ultimately, it is national income that matters for the overall economic wellbeing of new zealanders. the wedge between gdp and national income has some quite complex welfare implications for government, which has to balance how much its policies aim to promote activity in new zealand, or activity owned by new zealanders, whoever or wherever they may be. one particular consequence is seen in our current account deficit, a measure of the external financing required by the country ’ s investment - savings imbalance. in recent years about half the deficit has been represented by the trade imbalance. the other half has mainly been the imbalance of income earned by foreigners in new zealand compared with that earned by new zealanders abroad. measurement problems apart, this appears to have been growing as a result of recent investment trends. a further decline in the ownership share of new zealand business will worsen this deficit and put the balance of payments under continued pressure. interestingly, our net