lesetja kganyago : the global economy and south africa ’ s challenges address by mr lesetja kganyago, governor of the south african reserve bank, at the conference of the industrial development corporation ( idc ), sandton, 19 october 2015. * * * good morning and thank you for the opportunity to address you at this important milestone in the history of the industrial development corporation. south africa ’ s industrial development was initially shaped by mining, but linkages to the rest of the economy spurred the growth of the manufacturing sector. today, industrial development is still seen as central for economic growth and employment creation in the country. however, south africa ’ s manufacturing sector is currently facing significant short - term as well as longerterm challenges. fifteen years ago, the sector accounted for about 18 per cent of gdp, but today its share is 12, 5 per cent, with the finance, real estate and business services sector now the single largest sector at almost 20 per cent. since the global financial crisis in particular, south africa ’ s global competitiveness has been deteriorating, as reflected in the country ’ s declining share of world trade. longer - term constraints to industrial development include the pace of global technological change, the changing nature of global value chains, the lack of appropriate skills, logistics and infrastructural deficiencies as well as rising input costs, to name but a few. these issues will be discussed in some depth by the panels during the course of the day. my address this morning will attempt to set the scene by focusing on the current global and domestic contexts as well as the challenges that these pose to future industrial development. no discussion about competitiveness is complete without reference to the exchange rate, which is often too easily seen as either the cause of or the potential panacea for south africa ’ s competitiveness woes. given its volatile behaviour, the exchange rate is an important focus of monetary policy, and i will make some comments on this issue as well. the global economic outlook allow me to begin with the outlook for the global economy that has not fully recovered from the global financial crisis. while emerging - market economies recovered relatively quickly from the crisis, recovery in the advanced economies has been hesitant at best. in the past four years or so, we have seen a familiar pattern : one of optimism at the beginning of the year that the global economy will improve, only for these hopes to be disappointed quite early on in the year. more recently, however

engaging in these activities and universal banks may also be able to control the equity participation in the industrial firms. the implementation of the relevant european union directives and the rise of mergers and acquisitions between banks, securities companies and insurance companies support the universal nature of european banking. the us and european banks are able to offer sophisticated financial products, establish international conglomerates putting pressure now on asian banks to improve the product offerings in their own markets. although universal banks already exist in many asian countries, in general, asia lags behind in this aspect. not all asian countries permit universal banking. for example in china, the law strictly segregates banking and securities related activities based largely on the conflict of interest concerns and unique situations arising from the government ’ s dominant role in the banking sector and the securities markets, both in the capacity of owner as well as regulator. to me whether we take this route or that route, it is important for us to have some reflection because we need economies of scale, and we need credit diversification and efficient delivery of financial services. in order for us to compete, we need to look at the other structures. similarly, we all know about what has been going on in the insurance and pension system as reforms there have been delayed so much that i feel that we should now look at more innovative structures. before we delve into any of these areas, as regulators, we need to reflect about which regulatory framework would be appropriate. finally the other point which i want to talk about is the need for us to be risk - takers in the financial markets. as a central bank, i feel that we have done our job by introducing the necessary regulations and the framework for derivatives and products of that nature. these regulations provide guidelines for transacting otc derivatives in the country and currently permit three types of derivative transactions : 1. foreign currency options ( fx options ), 2. forward rate agreements ( fras ) and 3. interest rate swaps ( irss ). so far we have managed to grant the status of the authorized derivatives ’ dealers to three banks : standard chartered bank, citibank and united bank limited. the use of financial derivatives is a recent phenomenon in pakistan and the first such real derivatives transaction took place in august 2003 which was a rs. 100. 0 million fra. during the last one and a half years, the derivatives market has grown considerably. besides the plain vanilla products as mentioned a minute before, the market is slowly and gradually moving towards more