gill marcus : overview of the south african economy address by ms gill marcus, governor of the south african reserve bank, at the 93rd ordinary general meeting of shareholders, pretoria, 26 july 2013. * * * dear shareholders, members of the board, deputy governors, ladies and gentlemen, the past financial year has been as difficult as any since the global financial crisis began. the crisis has continued to mutate and the impact on south africa has been compounded by domestic challenges that have at times overshadowed the global risks. the latest mutation comes in the form of a slowdown in the emerging market economies, which until recently had been the main engine of global growth. in its recent world economic outlook update in july, the imf revised down its april forecasts for global growth in 2013 by 0, 2 percentage points, mainly as a result of a sudden deterioration in the outlook for the emerging markets. the brics countries featured very strongly in this downgrade : growth in china was lowered from 7, 8 per cent to 7, 5 per cent ; russia from 3, 4 per cent to 2, 5 per cent ; india from 5, 8 per cent to 5, 6 per cent ; brazil from 3, 0 per cent to 2, 5 per cent and south africa from 2, 8 per cent to 2, 0 per cent. the speed of this downturn is cause for concern, and illustrates that the idea that the emerging markets can decouple from the advanced economies and become an independent engine of global growth is overly simplistic. this slowdown is compounded by financial market uncertainties and turbulence that followed the announcement by the us federal reserve that it may begin to slow the pace of asset purchases. long - term yields spiked in both advanced and emerging bond markets, as capital flowed out of emerging markets in particular. while the markets have calmed down somewhat following their original overreaction, this episode illustrates not only the difficulties that advanced economies will have in reversing their highly accommodative monetary policy stances in the future, but also the likely spillover effects on emerging and developing countries. our challenge as a country will be to anticipate and reduce our vulnerability to these risks. in the meantime, however, loose monetary policy is expected to persist in most of the advanced economies as downside risks to growth continue and inflation remains largely benign with a concern about deflation rather than inflation, particularly in japan and the united states. the eurozone remains mired in a deep

##ening recession, the japanese recovery is uncertain, and the us economy, while showing signs of improving, is facing headwinds from a sharp fiscal contraction. the south african economic growth prospects have also weakened in the face of global and domestic constraints. the bank ’ s most recent forecast is for growth of 2, 0 per cent in 2013, rising to 3, 3 per cent next year. however, there are downside risks to this forecast, particularly given electricity supply constraints. at the same time, driven mainly by a depreciating currency and rising wage and salary costs, the forecast inflation path has moved up, and a temporary breach of the target range is expected in the third quarter of this year, despite an absence of strong demand pressures. although our forecast suggests that inflation will remain within the target range thereafter, it is uncomfortably close to the top of the target range and the risks to this forecast are seen to be on the upside. the bank ’ s primary mandate remains price stability within a flexible inflation targeting framework. this means that we need to be cognizant of the state of the economy, and the bis central bankers ’ speeches policy dilemma has become more marked with rising inflation and slowing growth. against the backdrop of a volatile currency responding to domestic and global developments, we can expect a challenging year ahead for monetary policy. as was elaborated in the annual report, the bank has the responsibility to act on its expanded mandate of financial stability. this is part of a global phenomenon which has seen responsibility for financial stability and macroprudential oversight becoming increasingly the responsibility of central banks. this has raised expectations about what central banks can and should do, with the danger that expectations can become unrealistic. the move to the twin peaks regulatory architecture is well under way. in terms of this framework, the bank has been given responsibility for prudential regulation of the financial sector, which will entail a move of a number of personnel from the financial services board ( fsb ) to the bank. in addition, the bank has been given responsibility for macroprudential oversight. the coming year will therefore not only see logistical and personnel challenges, but also challenges of integrating our expanded mandate of financial stability with our primary mandate of price stability. an important function of the bank is the management of the country ’ s official gold and foreign exchange reserves. for some time there has been a need to build up the country ’ s holdings of foreign exchange reserves, which were – and still are – low