place in may in the bond exchange nevertheless had far - reaching effects for the south african financial situation. the yield on long - term government bonds, for example, rose from a monthly average of 12. 9 per cent in april to over 18 per cent in september, and fluctuated widely on a daily basis to peak at over 21 per cent at one stage. the adverse effects of the net selling of bonds by non - residents quickly spilled over into the market for foreign exchange. pressures in this market led to an eventual devaluation in the nominal effective exchange rate of the rand of 16. 4 per cent from the end of april 1998 to 31 december 1998. the country ’ s net gold and foreign exchange reserves, which increased by almost r19 billion over the fifteen months that ended in march 1998, then declined again by r12½ billion over the last three quarters of last year. at the end of 1998, the total official reserves of the country amounted to about r31. 6 billion, the equivalent of about two months ’ imports. these changes in the capital account of the balance of payments, which were obviously directly linked to the worldwide dispersion of the east asian crisis, forced the reserve bank to switch to – 2 – a more restrictive monetary policy. the interest rate on the reserve bank ’ s daily repurchase transactions with banking institutions increased from below 15 per cent in early april 1998 to almost 22 per cent in august. in light of the declining amount of liquidity in the banking sector, and the rising rate for reserve bank accommodation, banking institutions raised their prime lending rate from 18 per cent in april 1998 to over 25 per cent in august. with these adverse developments in the financial markets, the outlook for an early improvement in real economic activity faded. on the contrary, overall economic activity slowed down further. in the third quarter, total real gross domestic product indeed showed an annualised rate of decline of 2½ per cent. it is estimated that, on balance, total gross domestic product in 1998 was not much different from that of 1997. the negative developments in the global financial and commodity markets had some adverse effects also on the current account of the balance of payments. the deficit indeed increased from a level of about r7 billion in the first half of the year to a level of about r18 billion in the second half. special imports, however, contributed to this increase in the negative balance, and indications are that the growth in imports is now slowing down in line with the more

mr stals looks at south africa ’ s financial and economic prospects for the next five years address by the governor of the south african reserve bank, dr chris stals, at conferences organised by omega investment research ( pty ) ltd held in frankfurt on 25 / 1 / 99 and zurich on 27 / 1 / 99. this overview of the south african economy is presented in three parts. firstly, recent developments in the economy and the current situation are summarised to provide a background for possible future developments. secondly, the more important structural economic adjustments that are now in progress and that will have an important influence on the course of future developments are referred to. thirdly, a longer - term view is taken of developments over the most recent past two five - year periods, supplemented with a forecast for the next five years. 1. recent developments and the current situation the year 1998 turned out to be a very frustrating one for the south african economy. during the first quarter, encouraging signals of an imminent improvement in underlying conditions emerged. substantial amounts of foreign capital flowed into the country, mainly in the form of portfolio investments in south african bonds and equities. the country ’ s foreign reserves increased sharply ; there was upward pressure on the exchange rate of the rand ; domestic liquidity increased ; and interest rates declined. at that stage, there was some optimism that the fairly depressed conditions in real economic activity since the second half of 1997 would be turned into a new upswing during the course of 1998. growth in real gross domestic product, which had declined from a level of about 3½ per cent per year in 1995 and 1996 to below 2 per cent in 1997, was predicted to rise again in 1998. however, the south african economy was severely shocked when the large inflows of foreign funds in the form of portfolio investment in south african bonds were suddenly reversed in may 1998. non - residents increased their holdings of south african bonds by r16 billion during the first four months, but then became net sellers, and reduced their holdings of south african bonds by r26 billion over the next eight months. it is interesting to note that, throughout last year, nonresidents remained more positive about investment in south african equities and increased their holdings of shares acquired through the johannesburg stock exchange by r42 billion over the year as a whole. despite the large disinvestment in bonds, non - residents still increased their overall holdings of south african securities by r32 billion. the abrupt change that took