somewhat slow to act as a shock absorber or adjustment mechanism to provide support to the trade account and the balance of payments. south africa ’ s current account deficit widened from 2. 8 per cent of gdp in 2010 to 6. 3 per cent in 2012. the trade deficit grew on account of increased imports related to the infrastructure investment programme, and lacklustre exports, as well as declining terms of trade. the depreciation of the rand exchange rate resulted in a deterioration in the bank ’ s inflation outlook, and the targeted measure of inflation increased from just below 5. 0 per cent in august 2012 to 6. 4 per cent in august 2013. still, however, there was little evidence of any demand pressures, with much of this increase driven by cost push factors. it is the improvement in growth prospects for advanced economies, in particular the us, that saw the rand again recouple with global developments on talk of asset purchase tapering. expectations of tapering had a profound impact on financial markets of both advanced economies and emerging markets, but more particularly for the latter as it is deemed that such a withdrawal of stimulus will negatively impact on portfolio flows to emerging markets. indeed, capital inflows retreated somewhat, and in south africa we witnessed a pull - back especially in bond inflows. during may and june this year, we witnessed a net outflow of over r17 billion from our bond market although this was partially offset by equity inflows. from the beginning of may the rand exchange rate depreciated from r8. 90 against the usd to levels of r10. 40 in august. a number of central banks in emerging markets reacted quite differently to these movements, with some tightening monetary policy despite an evident slowdown in growth, others intervening in the foreign exchange market and others draining liquidity in local markets. the central bank of brazil has since april this year, increased its policy rate by a total of 225 basis points to 9. 5 per cent due to inflation pressures and to shore - up the currency and limit capital outflows, while also lifting previous taxes on capital inflows. the central bank in indonesia increased the policy rate by 150 basis points thus far in 2013 to bis central bankers ’ speeches 7. 25 per cent, but in emerging europe we have seen various interest rate reductions. 1 the people ’ s bank of china ( pboc ) reacted by initially tightening liquidity conditions, only to be relaxed soon thereafter to reverse a substantial increase in

of south africa ’ s export commodities weakened during the second half of the year and the federal reserve raised its main policy rate in december 2015. perceptions of south african risk were also important, with the rand depreciating abruptly on news that finance minister nhlanhla nene had been removed from his post. bond prices and credit default swaps on south african government debt also spiked, signalling investor concern about the reliability of the south african government as a borrower. research suggests that markets were pricing government bonds as if south africa had already lost its investment grade credit rating. conditions deteriorated further early in the new year, when china ’ s economy experienced a period of stress. the shanghai stock market index fell sharply and the renminbi was allowed to depreciate abruptly against the us dollar, triggering a bout of capital flight from china. in an atmosphere of market fear and risk aversion, the rand depreciated further, in line with many of its peer currencies. this sell - off in emerging market currencies went too far – an excellent example of the wellknown phenomenon of overshooting in exchange rate markets. as a result, emerging market currencies were primed for a rebound episode. world economic conditions began to move back in their favour in the second quarter of the year. china ’ s growth stabilised with help from stimulus policies, and commodity prices stopped falling and even registered gains. meanwhile, risks emanating from the brexit convinced the world ’ s largest central banks to either ease policy or delay further tightening. the net result was an appreciating trend in emerging market currencies. in line with the overshooting diagnosis, the countries which experienced the largest depreciations during the sell - off phase enjoyed the biggest rebounds. south africa joined this rally : the rand strengthened through june and july, reaching a recent high of r13, 23 in early august. the south african currency benefitted from commodity movements, including from a higher gold price following the brexit. we also saw the effects of a renewed search for yield by investors looking for something better than negative interest rates on advanced economy government bonds. in addition, domestic factors were supportive of the rand. the major ratings agencies reaffirmed south africa ’ s sovereign investment grade credit rating in june. the local elections in august demonstrated the vitality and competence of our democratic institutions. but the rand ’ s appreciation phase would be short - lived.