lesetja kganyago : the impact of the eurozone and global financial crisis on south africa speech by mr lesetja kganyago, deputy governor of the south african reserve bank, at the lereko metier capital growth fund investor conference, magaliesburg, 1 march 2012. * * * programme director chair and directors of lereko ladies and gentlemen all protocols observed the waves of the global financial crisis hit our shores as expected. the ferocity with which they hit our country was more pronounced than we could ever imagine. fortunately, south africa had built strong policy anchors. nevertheless, the impact reverberated across the entire economy. tonight i would like to take you through our experience through the waves. i want to say a few things about the south african economy in the global financial crisis and its current european incarnation. in particular, i want to provide some perspective on the economy ’ s resilience to global shocks and how our macroeconomic policy settings enable the economy to weather global storms. a crisis in waves the global economic crisis came in waves. the initial surges were relatively supportive of the economy. rising commodity prices in the period from 2003 to 2008 increased the terms of trade of the economy in a strong and sustained way, boosting export revenue and making rising import prices tolerable. over this period, 2003 to 2008, the terms of trade increased by 7. 1 percent. a steady flow of saving from non - residents into rand - denominated assets contributed to cheap financing and with a stronger currency made possible the importation of considerable capital equipment, a less costly infrastructure build programme, and improved welfare for households as imported consumer goods became less costly. from 2003 to 2008, real household consumption growth averaged 5. 8 percent. real gross fixed capital formation grew by an annual average of 12. 6 percent. compared with the 1990s, average annual real gdp growth was 4. 6 percent over this period. the manufacturing sector alone had real fixed capital formation growth averaging 3. 7 percent a year and grew by an annual average of about 4. 0 per cent. the second wave was much less benign. this was the sustained rise in global food prices, which generated strong upward pressure on domestic food prices and eventually the overall price level. headline inflation rose strongly, peaking at 11. 1 per cent in september 2008. the rise in inflation and subsequent monetary policy response ( the policy rate increased from 7. 0 per cent to 12. 0 per cent between may 2006

increased the risk of financial contagion. in that context, reducing vulnerabilities must be a key priority for the monetary and fiscal authorities. to conclude, sa fared better than many peers. going forward, reducing vulnerabilities would entail strengthening our three key anchors. south africa has almost no direct financial exposure to institutions in europe, in part because of limited direct institutional linkages and in part due to our pre - existing macro - prudential policy framework, a key anchor. nonetheless, reorganisation of the regulatory approach to the financial sector is underway to strengthen the capacity of regulators to address sectorspecific challenges that may arise in the future and enable appropriate responses in the event of shocks. basel 2 provides the basic template for our domestic regulatory initiatives, even as discussions on basel 3 plus appropriate flexibility for emerging market economies are ongoing. on the fiscal policy side, the medium term expenditure framework sets out a consolidation path that caps the rise in the public debt at comparatively low levels. as the economic recovery proceeds, the fiscal position will show further sustained improvements as we have seen in the latest budget numbers. lastly monetary policy : the financial shocks that south africa will face in future will continue to be best addressed with a flexible inflation targeting framework that allows the currency to cushion the domestic economy from volatility. forward looking inflation expectations and transparency by the monetary authorities hold the key to minimizing exchange rate bis central bankers ’ speeches pass - through to domestic inflation. this will not always work as well as we would like, but is far better than the alternative of having to move domestic interest rates on a frequent basis to try to maintain a stable exchange rate. underlying the sustainability of these macroeconomic policies must be efforts to improve productivity, skills development, and improve the flexibility of wages and prices. stronger economic growth, sustaining people in jobs and more rapid job creation are our best defences against the economic shocks of the world in which we live. thank you. bis central bankers ’ speeches