of the harsh but not unreasonable disciplines of the global markets. 2. south africa and financial globalisation over the past few years, the south african financial sector has moved quite fast on the road of globalisation. in the annual report for 1997 of the bank supervision department of the reserve bank, interesting information has been made available about developments in the south african banking sector in 1997. there are now more than 20 foreign banks operating in south africa through locally - established branches or subsidiaries, and more than 60 foreign banks with representative offices in south africa. south african banks are also extending their activities to the rest of the [UNK] - [UNK] world and during 1997 obtained permission from the registrar ’ s office to establish more than 45 branches, subsidiaries, and representative offices in other countries around the world. at the end of 1997, the total south african banking sector utilised more than r35 billion in foreign funding, and carried loans extended by them in foreign currencies of about r17½ billion. the foreign liabilities and foreign assets of the south african banking sector, respectively, represented but small percentages of the total assets ( or total liabilities ) of the banking sector, estimated at about r440 billion as at 31st december 1997. foreign funds as a source of financing of the activities of south african banking institutions are, however, still increasing. it is well - known that non - resident investors have become very important participants in the south african financial markets. over the past 16 months, that is since the beginning of 1997, non - resident investors increased their holdings of south african equities by r45. 6 billion, and their holdings of south african bonds by r31. 1 billion. the south african government raised a total amount of approximately r11. 3 billion in seven public loan issues made in international capital markets since december 1994. at the same time, many south african public and private sector borrowers also made use of the foreign financial markets to fund the expansion of their activities in south africa, and in the rest of the world. the gradual relaxation of exchange controls has indeed enabled south african residents to acquire large foreign assets abroad. the following estimates provide some indication of the extent of these investments since the beginning of 1994 : direct foreign investment by south african corporates portfolio foreign investment by south african institutional investors portfolio foreign investment by south african private individuals r44. 3 billion r37. 4 billion r1. 1 billion volumes in the south african foreign exchange market increased substantially in recent times. at this jun

7 per cent, while the forecast for 2012 has been reduced from 3. 9 per cent to 3. 6 per cent. the risks to this outlook are seen to be on the downside, mainly on account of risk to the global economy. the bank ’ s inflation forecast has been adjusted higher on a few occasions this year to take into account higher oil and food prices. at the last sitting of the mpc in september, the inflation forecast was left largely unchanged. it is expected that inflation could breach the upper end of the target range in the final quarter of 2011 and to peak in the first quarter of 2012 at around 6. 2 per cent, but then to return within the target range in the second quarter. in the final quarter of 2012, inflation is expected to ease to around 5. 5 per cent. the bank ’ s measure of core inflation shows a rising trend, peaking at around 5. 1 per cent in the second and third quarters of 2013. what is important for the bank is the trajectory of inflation and to what extent any breach of the target is sustained. our assumptions at this stage point to a temporary breach of the inflation target. however, there are a number of upside risks to the inflation outlook which require careful monitoring. the main upside risks continue to emanate from exogenous factors, as well as administered prices, and despite the easing in wage pressures this year, this could become a factor going forward. the stronger currency to some extent helped to contain inflationary pressures domestically, but more recently, the depreciation of the rand brought to the fore the potential upside risk emanating from a sharply weaker currency. to what extent one should be concerned about the recent depreciation in the rand exchange rate is a function of many factors, including whether it is short - term or longer - term in nature, the eventual magnitude of the depreciation, the pricing power of firms, the stickiness of prices, the history of inflation and the domestic content of traded goods. clearly, the mpc is having to deal with a delicate balance at present between the upside risks to inflation and the downside risks to growth. much is dependent on the unfolding global environment, in particular growth prospects in the us, and the sovereign debt crisis in the euro zone, whether or not this turns into a banking crisis and spills over to other areas of the world. should european leaders manage to avert a full - blown crisis, this will go a long way to