andreas dombret : facing up to the original sin - experiences of establishing a local currency bond market opening remarks by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the " local currency bond markets " conference, pretoria, 8 march 2018. * * * 1. introduction dear governor lesetja kganyago dear deputy governor daniel mminele ladies and gentlemen i am very honoured to be here today at the conference centre of the south african reserve bank ( sarb ) in pretoria. this conference is another symbol for the close partnership between the sarb and the bundesbank. this partnership, together with our joint chairmanship of the g20 africa advisory group, gave the impetus for this event. the africa advisory group coordinates the g20 ” compact with africa ” initiative that aims at promoting inclusive growth and investment in africa. i am convinced that this conference on local currency bond markets will provide valuable insights on how the initiative ’ s goals can be reached. let me start with a reminder of why we are all here today. true, we have come to talk about local currency bond markets. but why are they important for a country ’ s financial system? time and again, throughout the history of economic development, emerging economies have given in to the temptation to over - borrow abroad, which often gives rise to a significant currency mismatch on their aggregate balance sheets. risky borrowing in foreign currencies can be tempting because it is often cheaper than raising funds at home – last but not least as foreign creditors accept lower interest rates when the exchange rate risk is born by the debtor. in blunt terms, over - borrowing abroad is called the “ original sin ” of an emerging currency because – although it comes at low cost in good times – it may cause serious damage to the economy when there is an abrupt currency shift. in contrast, the existence of a functioning local currency bond market can lower financing costs at home and thereby provide the incentive to reduce foreign currency exposure. in the face of volatile global capital flows, it can therefore help making emerging economies crisis - proof. what is more, sound local currency bond markets support the development of a country ’ s financial sector and can channel foreign capital into an emerging economy, a valuable source of long - term financing for both the government and the private sector. now, some of you may be thinking : why is a german discussing these issues – given that german sovereign bonds count internationally as “ safe haven ” investments and are

euro area exports should continue to benefit from strong world economic growth. accordingly, we expect continued relatively moderate economic growth in the euro area in 2005 and 2006, as reflected in the ecb staff projections published earlier this month, which are broadly in line with available forecasts from international and private sector organisations. nevertheless, the outlook for economic activity continues to be surrounded by uncertainties. on the external side, high and volatile oil prices and persistent global imbalances pose downside risks to growth. as regards exchange rates, we confirm our position – expressed when the euro rose sharply – that such moves are unwelcome and undesirable for economic growth. on the domestic side, there are uncertainties surrounding the evolution of private consumption, while the favourable financing conditions and the recovery in corporate earnings could lead to higher investment growth than is currently projected. turning to price developments, the evolution of oil prices and increases in indirect taxes and administered prices have had a significant impact on consumer price inflation in the course of last year. for 2004 as a whole, annual hicp inflation was 2. 1 %. more recently, the annual inflation rate declined quite substantially, falling to 1. 9 % in january from 2. 4 % in december, largely a result of base effects from developments in indirect taxes and administered prices in some countries. eurostat ’ s flash estimate of annual hicp inflation in february was 2. 0 %. in the coming months, annual inflation rates are likely to fluctuate around 2 %. looking further ahead, there is still little evidence that stronger underlying domestic inflationary pressures are building up in the euro area. wage increases have remained moderate over recent quarters and this trend should continue in the context of moderate economic growth. accordingly, the ecb staff projections put average annual hicp inflation between 1. 6 % and 2. 2 % in 2005 and between 1. 0 % and 2. 2 % in 2006, broadly unchanged from the eurosystem staff projections published in december. this is consistent with forecasts recently released by international and private sector organisations. however, risks to price stability over the medium term remain on the upside, requiring continued vigilance. such risks continue to be associated mainly with oil price developments, uncertainty regarding future increases in indirect taxes and administered prices, and potential second - round effects stemming from wage and price - setting behaviour. in this respect, developments in long - term inflation expectations need to be monitored closely. our monetary analysis also calls for vigilance regarding