x p guma : the south african economy and financial markets – outlook, risks and policy responses address by dr x p guma, deputy governor of the south african reserve bank, to the south africa economic conference ” business unusual ”, johannesburg, 4 september 2008. * 1. * * introduction our meeting here today occurs during a period of considerable uncertainty : financial turbulence in the major industrialised economies being the proximate cause of international uncertainty ; with a variety of factors impacting upon the short - term indicators of domestic economic performance. it is, therefore, appropriate, i think, to attempt to place recent economic developments in some perspective as this may go some way towards piercing the veil of gloom which appears to have descended over this and other economies. and, for this reason, i thank the organisers of this conference for according to me the opportunity to participate in these discussions. 2. overview of key economic indicators : south africa in order to assess the south african economy ’ s performance over the medium - term, i have chosen to divide the period from 1990 to 2007 broadly into five - year segments, as indicated in tables 1a and 1b : namely, the periods 1990 - 1994 ; 1995 - 1999 ; 2000 - 2004 and finally, the most recent period 2005 - 2007. as these tables show, real gross domestic product grew at progressively increasing rates throughout this period : from an average rate of 0. 2 per cent during 1990 - 1994 to an average rate of 5. 2 per cent during the most recent period. the strongest sectoral growth occurred in the secondary and tertiary sectors, with growth reaching levels, on average, of 5. 8 per cent and 5. 7 per cent, respectively, over the period 2005 - 2007. the economy has become more open with the sum of exports ( x ) and imports ( m ) as a percentage of gross domestic product ( gdp ) increasing progressively, from 40. 6 per cent on average, between 1990 and 1994 to 61. 6 per cent on average during the period 2005 - 2007. and inflation, as measured by the consumer price index ( cpi ), had decreased progressively from an average annual rate of 12. 5 per cent in the early period, to an average rate of 5. 1 per cent during 2005 - 2007. 1 developments in the financial markets have, in general, been consistent with those described above regarding the real sectors of the economy. stated briefly, the assets of the banking sector have increased substantially ; from a nominal value of r281

billion on average, between 1990 and 1994 to an average of r2 100 billion on average between 2005 and 2007. the average market capitalisation of the bond market has increased, in nominal terms, from an average of r374 billion between 1995 and 1999 to an average of r860 billion between 2005 and 2007. and the average market capitalisation on the jse limited has increased from an average of r920 billion during the first of our time periods to an average nominal value of r5 697 billion in the last period. data for cpix became available only during the year 2000. moreover, as has been noted elsewhere 2, growth in south africa ’ s securitisation market has remained relatively healthy since its emergence in 2000. however, this market is subject to cyclical variation to a far greater extent than are others. in the fairy tale from which the description “ goldilocks ” is derived, experimentation by the heroine leads to temporary bliss : not all the plates of porridge were of a temperature that was just right. but one was. and that plate was licked clean – finished, exhausted of its contents. so too, some would have us believe, with the south african economy : it could, apparently, have been described as approximating a goldilocks economy, with most of the key ratios being “ just right ” ; neither too strong nor too weak ; neither too hot nor too cold. just right or on the way to being just right. until march 2007. as explained by dr m mnyande 3, chief economist of the south african reserve bank ( the bank ), the first sign of a possible turning point in the business cycle indicator, which is calculated by the bank, is usually when the composite leading business cycle indicator changes direction clearly for a period of at least six months. and, in march 2007, the leading indicator reached its most recent peak, whereafter it has been following a downward trend. it was also in march 2007 that cpix, the measure of the rate of inflation that is of interest to the monetary authorities was last within the target range of 6 to 3 per cent which is specified as being the inflation target. then, global food and fuel price shocks intensified, employment growth abated, real value added in manufacturing contracted as production was hampered by strike activity in the motor industry and slowing demand, inter alia. household debt started to edge higher, the deficit on the current account of the balance of payments widened to 8.