them illegal and often violent, in other mining or economic sectors, has refocused the attention of financial markets and rating agencies alike on south africa ’ s labour market challenges. while there are at this stage no indications of a broadbased, sharp acceleration in wages as a result of recent protests, the reserve bank will have to carefully monitor possible spillovers of any such development into prices and price expectations. we have already seen an impact on the exchange rate of the rand, which almost touched r9. 00 against the usd about a week ago. the rand appears to have decoupled from the eurusd movements, taking its cue instead from domestic developments, including the credit rating downgrades, widespread strike action and the current account deficit. growth forecasts will most likely need to be revisited. as for the recent actions by rating agencies, these were obviously unfortunate and disappointing developments. the south african authorities are concerned about assessment of the south african credit at this point in time by the two rating agencies that recently adjusted their ratings. it has to be acknowledged, however, that some of the challenges they are pointing out, that as south africans we need to deal with, are not new, are known to us and are in fact valid. as already indicated, we will have to, collectively inside and outside government, and in a coordinated and consistent manner, engage rating agencies, to communicate the strength of the fundamental underpinning of the south african economy and its institutions, and more clearly convey our commitment to addressing areas of weakness and potential vulnerability highlighted, and to put south africa on a different rating trajectory going forward. macro - prudential variables are also key to a central bank ’ s margin of manoeuvre in responding to adverse economic shocks, and the reserve bank is paying particular attention to these indicators. indeed, back in april this year, the imf pointed out in its world economic outlook that emerging and developing economies needed to “ avoid over - stimulating activity to make up for less demand from advanced economies ”, pointing to the risk of overheating pressures from activity, credit growth or high commodity prices. but in contrast to some of its peers, south africa benefits from a relative absence of such potentially inflationary pressures. private credit growth has remained in single - digit territory for more than three years now ; home prices are failing to display any clear uptrend in real terms ; and the banking sector ’ s prudent approach to lending has enabled a decline in impaired advances to

yet policymakers cannot stand idle and wait for these imbalances to resolve themselves. the experience of the 1930s is there to teach us that failure to act, or an anchoring of policy to standards that are no longer adapted to the economic realities of the day, can easily turn low growth into a recession, and a recession into a depression. if structural adjustments in an economy result in an elevated degree of bis central bankers ’ speeches slack for an unusually long period, then the macro policy mix should equally be characterized by an unusually long phase of accommodation. this way, the risk of permanent damage to the economic tissue will, if not removed, at least be mitigated. yet should it be the fiscal or the monetary policymaker at the forefront of this response? over an extended period, both policies are not perfect substitutes. running large budget deficits for several years ( say, for as long as the output gap remains sizeable ), will quickly raise public debt as a share of gdp. in turn, this will result in a greater share of state resources being absorbed by the service of that debt ; a higher risk premium embedded into domestic interest rates as bondholders worry about fiscal sustainability ; and potential capital outflows as a consequence thereof. at worst, deteriorating public finances could more than offset the impact of monetary stimulus. it should be remembered that spain, currently mired in recession and facing an elevated credit risk premium on its sovereign debt, had the second largest budget surplus in the euro zone ( 2. 2 per cent of gdp ) in 2007, and a debt ratio of 36 per cent of gdp. in a word, prior to the crisis, spain did not have a fiscal problem. prudent fiscal management for almost two decades means that south africa does not face at present a meaningful fiscal constraint. at a projected 36 per cent of gdp in the present fiscal year, public debt is way below the levels seen in most developed economies, and relatively in line with the emerging world ’ s average. nonetheless, the situation leaves no room for complacency, and indeed the scope for responding to the current lack of strong economic momentum with additional fiscal stimulus appears very limited. the south african government has on many occasions reaffirmed its commitment to gradually reduce the budget deficit, so as to ensure that the net debt to gdp ratio stabilizes no higher than 40 per cent. it is in part for that reason that the national budget presented in february 2012 targets a reduction in the deficit from 4.