rand against a basket of currencies depreciated by 21. 4 per cent from 22 may 1998 to 31 august 1998, to bring the cumulative decline in the external value of the rand from the end of last year to 24. 6 per cent. the depreciation of the exchange rate encouraged further capital outflows in the form of negative “ leads and lags ”, and also led to speculative positions taken against a further depreciation of the rand. in the end, a net outflow of more than r13 billion in the form of private sector short - term capital exerted additional pressure in the foreign exchange market. • • • • the outflow of capital reduced liquidity in the banking sector and forced the banks to borrow more from the reserve bank on a day - to - day basis. the estimated daily liquidity needs of the banks increased from about r2 billion at the beginning of may to more than r13 billion in early june 1998. other interest rates followed the yield on long - term government bonds on its strong upward surge. the rate for repurchase transactions from the reserve bank increased from 14. 78 per cent on 12 may 1998 to 24 per cent on 22 june 1998, before it settled early in july at a level just above 21 per cent. banking institutions raised their prime overdraft rate from 18. 25 per cent at the end of april 1998 to 25. 5 per cent on 28 august 1998. in order to provide liquidity to the drained foreign exchange market, the reserve bank drew about r8 billion on foreign loan facilities and increased its outstanding hedge facilities in respect of future international balance of payments commitments from us $ 17. 5 billion at the end of april 1998 to us $ 25. 3 billion at the end of june 1998. having risen by 32. 3 per cent from december 1997 to an all - time high in may 1998, the average monthly level of share prices listed on the johannesburg stock exchange declined by 38. 7 per cent between may to september 1998. although the financial conditions started to stabilise again in early july 1998, the situation remained extremely sensitive throughout the next three months, up to september 1998. exchange rates, yields and interest rates and share prices reacted to rumours, speculative transactions and adverse international developments, and most of the financial aggregates showed great volatility. 3. adverse financial conditions brought negative developments in real economic activity the adverse developments in the financial markets had a negative effect on an already fragile real domestic

mr. stals discusses the current economic situation and factors influencing monetary policy in south africa in 1999 address by the governor of the south african reserve bank, dr. c. stals, at an international conference arranged by abn amro bank and kagiso financial services, held in johannesburg, on 3 / 11 / 98. 1. domestic economy dominated by international developments during the past six months the south african economic scene was dominated by developments in the international financial markets. the east asian financial market crisis, which already started with pressures in thailand ’ s foreign exchange market in june 1997, took some time before it spread to other emerging markets outside of the east asian region, and also to the smaller industrial countries of the world. more recently, financial markets in major industrial countries also became contaminated. in the case of south africa, the contamination took place through the disinvestment of foreign funds from the south african bond exchange. during the first four months of 1998, non - residents increased their holdings of south african bonds by r16. 3 billion. during the next five months, from may to september 1998, they reduced their holdings of south african bonds by r22. 4 billion. this major switch was directly linked to a reassessment made by foreign investors during april / may 1998 of their investment positions, and the decision to reduce their exposure in fixed - interest bonds of the emerging market economies. it is interesting to note that non - residents continued to increase their investment in south african equities. after increasing their investment in south african shares acquired through the johannesburg stock exchange by r19. 4 billion in the first four months of 1998, they added a further r17. 3 billion during the following five months. the reversal in the investment trend on the bond exchange was, however, sufficient to change drastically the outlook for the south african economy, and some promising economic developments in the first quarter of this year were promptly aborted. 2. adverse financial developments lead the downward trend in the economy the sudden switch of foreign investors ’ sentiments had far - reaching effects in the south african financial markets : • • • the immediate effect of the withdrawal of investment funds from the bond exchange was a sudden and sharp increase in the yield on long - term bonds. the average monthly yield on long - term government bonds rose from 12. 9 per cent in april 1998 to 18. 3 per cent in september. the withdrawal of foreign investments created pressure in the foreign exchange market and the average effective exchange rate of the