t t mboweni : the outlook for the south african economy in a period of uncertainty address by mr t t mboweni, governor of the south african reserve bank, at the london capital club, london, 27 june 2006. * * * ladies and gentlemen, 1. introduction i was very pleased to have received this invitation to address the members of the london capital club today for two reasons. firstly, i suspect that this club might contain within its history the first seeds of central banking. i believe this club builds on the proud foundations of the gresham club, named after sir thomas gresham. and i was interested to learn that sir thomas was an advisor to king edward vi in 1551 on the financial difficulties facing the country at the time. sir thomas implemented a set of plans to overcome these difficulties, which raised the external value of the pound. in his management of these problems, one can perhaps conclude that sir thomas was one of the first - ever central bankers. indeed, sir thomas might have had an easier task if england had already followed a policy of inflation targeting at the time as both south africa and england do today. the second reason why i am delighted to be here today is that the south african reserve bank has a direct association with the london capital club. one of our former deputy governors, ian plenderleith, cbe, serves on the board of advisors of the club. i am therefore indeed honoured today to make a contribution to your deliberations but, more importantly, to enjoy lunch with you. recent upheavals in the international markets have placed the spotlight again on emerging markets. there is disagreement in the markets as to what this burst of global volatility actually reflects, with answers ranging from inflation concerns, to global liquidity and to the growth outlook. south africa has in the past few weeks experienced significant movements in the rand exchange rate and stock market prices. these developments may be seen by some as a threat to south africa ’ s recent strong growth performance, as well as to the growth strategy of the government. but that should not necessarily be the case. 2. recent international developments emerging markets have enjoyed an extended period of investor exuberance and search for higher yield over recent years, which, combined with a generally supportive environment of strong global growth and high commodity prices, have caused their currencies to appreciate, equity prices to increase and bond spreads to narrow. recently, we have experienced the effects of greater uncertainty about future inflation

bring about the adjustment, and it is also unclear how long these imbalances will persist. the persistence has already confounded a number of analysts who have been predicting a major readjustment of the us dollar for at least the past 4 years. going forward, there is always the concern that the underlying international imbalances could be resolved through a significant realignment of global exchange rates. estimates of how much exchange rates would have to adjust vary greatly. in 2005, obstfeld and rogoff for example, argued that the dollar adjustment could exceed 30 per cent. an adjustment of this order of magnitude will inevitably impact on the rand, but it is not clear whether under these circumstances the rand would find itself moving with the dollar, or in the opposite direction. much will depend on how world growth and risk perceptions are affected in such a scenario. whether or not there will be an orderly or disorderly unwinding of these imbalances, there is very little that some economies such as south africa can do to pre - empt these effects. the onus is on the large industrialised countries to try and ensure an orderly adjustment or to minimise the negative consequences that may ensue in the wake of a disorderly resolution. 4. international interest rate and inflation developments at the beginning of the 1990s, world inflation averaged around 30 per cent compared to an estimated 3, 8 per cent in 2006. in 1992 there were 44 countries with inflation rates in excess of 40 per cent compared to 3 in 2003. at the jackson hole conference organised by the federal reserve bank of kansas city in 2003, one of the issues that was hotly debated was the cause of this decline. central bankers of course claimed the credit, arguing that it was because of more disciplined monetary policies. others however argued that it was the forces of globalisation and the emergence of china. as one commentator observed, it reads a bit like an agatha christie mystery. the questions are, who killed the victim, how was the victim killed, and is the victim really dead? i think it is true to say that monetary policy has become more disciplined in the 1990s, but globalisation has probably played its part as well. there is no doubt that china has had an impact despite the upward pressure on commodity prices. for example, footwear and clothing prices, which have a weight of just over 4 per cent in our cpix, have been falling since october 2003. in the year to date, footwear and clothing prices