crippling sudden stops. the more difficult question is this : how will countries adjust to the ever - changing global circumstances, and what does this mean for their growth and development trajectories? let me set out some challenges / difficulties. first, a number of countries are running sizeable deficits on their fiscal and current accounts. countries with larger deficits have tended to experience more currency depreciation this year, which speaks to their vulnerability to changing global financing conditions – especially higher interest rates. reducing this vulnerability will require deficit reduction, as well as changes in the composition of spending that benefit longrun growth and therefore improve countries ’ future capacity to repay debt. this adjustment process is likely to be difficult, both for political economy reasons and because macroeconomic adjustment can hurt short - term growth, specifically via reduced demand or through import compression. rebalancing is therefore inevitable …. 1 this point was made in the latest international monetary fund world economic outlook, chapter 3. see https : / / www. imf. org / en / publications / weo / issues / 2018 / 09 / 24 / world - economic - outlook - october2018 # chapter % 203. page 2 of 8 second, there are pockets of prominent emerging market countries where growth has stalled. looking back over the past two decades, the 2000s were an era of unprecedented growth for emerging markets. the share of economies converging on rich - country living standards also reached new highs, demonstrating that this was more than simply ‘ a china story ’ or ‘ an india story ’ – important though those countries are. this record of success survived the global financial crisis, but only by a few years. from approximately 2013, emerging markets began to slow steadily, and some experienced protracted recessions. outside of asia, the emerging market story is now largely about subdued growth, and some countries are talking about lost decades. we need to find a way back to growth. the third problem follows when politics catch up with economics. in advanced economies and emerging markets alike, dissatisfaction with economic outcomes has generated political developments that would have been very unlikely, if not unthinkable, even half a decade ago. sometimes these reactions have made things worse, or threaten to do so, creating a vicious circle of bad economic decisions and further political disaffection. these problems – macroeconomic disequilibria, stalled growth and political feedback loops – add up to a difficult set of circumstances for the emerging markets. today, i

an address by lesetja kganyago, governor of the south african reserve bank, at the south africa tomorrow conference, new york, 1 november 2018 south africa ’ s adjustment path good morning, ladies and gentlemen. thank you for the opportunity to share a few thoughts with you today. last year, we had a goldilocks global economy. inflation started picking up in the advanced economies, and in emerging markets, it was generally in line with targets. growth was stronger, but without much evidence of overheating. growth was also widely shared – most economies were accelerating. the world economy felt just right. as you know, at the end of the goldilocks story a family of bears comes home. our goldilocks tale has taken the same direction. the synchronisation of global growth has broken down this year, with the united states ( us ) surging ahead while other countries slow down. with unemployment at very low levels, the federal reserve has been raising rates, just as they told us they would. the combination of stronger us growth and higher rates has appreciated the dollar. this combination of factors has posed challenges for emerging markets. it has interrupted capital flows and prompted wide - scale currency depreciation. countries with substantial stocks of foreign - currency debt have seen their balance sheets deteriorate. inflation pressures have generally intensified. unlike goldilocks, however, most of us in emerging markets weren ’ t caught napping when the bears showed up. we had frameworks in place to handle such challenges. in particular, most of us could rely on flexible exchange rates to absorb the initial page 1 of 8 shock. this works best when countries have avoided contracting excessive foreigncurrency debt, as in the south african case. in these circumstances, the best thing one can do is to leave the foreign exchange markets to find its equilibrium. it is well understood that currency depreciation creates inflationary pressures. but many emerging market countries have strong central banks who can deal with this problem. given the credibility accumulated by these institutions, inflation expectations have stayed anchored in most emerging markets. 1 emerging markets have also been buffered by substantial stocks of foreign exchange reserves. it is clear that most countries are vastly better positioned than they were during the 1997 / 98 crisis. certainly, a few countries have been sorely tested by events this year, and the international monetary fund has been called into action. most emerging markets, however, should be able to get through without experiencing financial crises or