design was followed, and the banks were exposed to four adverse scenarios, including a protracted recession and a period of excessive financial market volatility. the results of the exercise confirmed that south african banks were adequately capitalised to withstand significant credit losses throughout the stress scenarios, even before taking into account any mitigating action by their management teams. after the brexit referendum, financial markets in emerging - market economies were exposed to significant levels of volatility. the south african reserve bank and national treasury have been monitoring these developments and their possible implications for south africa. in a subsequent statement, the minister of finance, mr pravin gordhan, reassured the public that the banking and financial institutions in south africa were well placed to withstand any brexitrelated financial shocks. the south african financial system, including the banks and the regulatory framework which governs them, is resilient and robust and this had been clearly demonstrated during the global financial crisis. furthermore, we are starting to see tentative signs that export - orientated and importcompeting sectors may be starting to benefit from exchange rate depreciation. the most encouraging sign has been observed in the vehicle industry, where shipments abroad increased by 20, 5 per cent ( in volume terms ) in 2015 while the first few months of 2016 have shown a continuation of this upward momentum. the merchandise trade balance has improved, with a cumulative deficit of r18, 7 billion in january to april compared with r32, 0 billion in the same period a year earlier. 4. how monetary policy adjusted to the situation some may ask : “ isn ’ t there a risk that the consecutive interest rate increases implemented by the south african reserve bank over the past year may nip this recovery in the bud? ” as i ’ ve mentioned earlier, we must appreciate that “ policy space ” in south africa has narrowed. i would, however, like to expand on the bank ’ s monetary policy stance and how it interacts with the business cycle. bis central bankers ’ speeches clearly, the situation that we have faced in the past couple of years – a combination of slowing real economic growth and accelerating price pressures – is not one that central banks particularly enjoy dealing with. demand fell short of potential and our estimates show that the output gap remained negative in 2015 and is likely to widen somewhat this year. yet inflation accelerated, driven by exchange rate depreciation and a number of supply side factors, including drought and electricity supply constraints. despite a slightly improved

could be looking at both a rebound in farm production and lower agricultural prices. such a reduced drag from drought conditions and falling resource prices should significantly ease the downward pressure on corporate profits, which may have troughed already. in the first quarter of 2016, the gross operating surplus in the economy as a whole picked up to 3, 8 per cent year on year from 1, 5 per cent in the previous period, the second successive bis central bankers ’ speeches increase after six consecutive quarters of deceleration. at the same time, high - frequency indicators such as the barclays pmi and the manufacturing production data for april suggest that the second quarter has started on a more solid footing. admittedly, many of these developments relate to the so - called “ base effects ” and are no guarantee that, once these effects have worn through, we will witness a sustained, stronger momentum in the south african economy. however, several – and more fundamental – patterns do suggest that the country should be relatively well placed to take advantage of a gradually improving global economic environment, notwithstanding the possible negative implications of the brexit. for example, continued growth in the bank deposits of the corporate sector – 8, 6 per cent year on year as of april – suggests that, despite its eroded profitability, the south african corporate sector is not facing the kind of liquidity pressure that typically preceded past recessions. in fact, bank lending to corporations is also rising at a fairly dynamic pace, pointing to some expansion in niche sectors such as renewable energy and commercial property. households, for their part, have managed to achieve some deleveraging over the prolonged period of low interest rates. thus, while the rate of home and vehicle repossessions has risen in recent quarters, it is still relatively low by historical standards. banks themselves continue to display solid capital adequacy, liquidity coverage and profitability ratios, suggesting that the risk of a sudden “ pull - back ” in lending to the private sector is quite limited at this stage. the lack of obvious imbalances in property markets, as residential house prices appear to be largely in line with underlying fundamentals, equally reduces the risk of “ homegrown ” financial or banking stress. the south african reserve bank last month released the results of its common scenario stress test which was designed to assess the soundness and resilience of the south african domestic banking sector. the test included all the domestic systemically important banks. a formal approach to risk identification and scenario