scope for an effective response. fiscal policy was seen as the main policy tool, but very quickly the debt to gdp ratio rose to alarmingly high levels at about 135 per cent, the highest in the oecd. this of course puts a brake on further fiscal stimuli, although tax reform measures have been mooted for later this year. at the same time the new reform programme committed the government to a reduced deficit at a time when unemployment had reached the highest levels in 34 years. furthermore, discretionary fiscal actions could well be offset by higher household saving, due to increased concerns about long - term fiscal sustainability. japan is not only in trouble due to problems with its banking sector, it also has suffered from the bursting of the it bubble. exports have declined significantly over the past year and continued weakness in the electronics market is expected. most indicators remain negative, particularly in the manufacturing sector which is characterised by excess capacity, declining employment and falling inventories. japan will be helped to some extent by an upswing in the us and asia. what is clear however is that japan will not be one of the locomotives of that upswing. despite the rhetoric to the contrary, there does not seem to be the political will deal with the problem of the non - performing bank loans. this will have macroeconomic costs in the short - run, but the reform of the banking system and corporate restructuring is essential for the overall recovery of japan. 6. emerging markets not surprisingly the downturn in the industrial countries resulted in widespread declines in economic activity in developing countries and a less favourable environment for international trade and financial flows. weak global growth hits those economies most that are dependent on trade, irrespective of whether they are exporters of technology or manufacturing, or commodity exporters. furthermore emerging markets are negatively affected by the decline in capital flows and the increased risk aversion of investors. the institute of international finance, for example, estimated inflows to emerging markets for 2001 at us $ 106 billion, compared with the earlier forecast of us $ 140 billion. the decline is ascribed to heightened risk aversion. similarly, while world exports were expected to rise by 2, 5 per cent last year, earnings of emerging markets were projected to decline by 2 per cent. 7. asia the weakness of japan is not only a problem for the broader global recovery, but for emerging asia in particular. most of the asian countries have strong export ties to japan and the continued weakness blocks off an important export destination.

in 2013 and 3, 8 per cent in 2014. the more favourable outcome for next year is predicated, to a significant degree, on a stronger recovery in the advanced economies, particularly in europe. therefore this forecast is subject to downside risk. part of this disappointing growth story has been due to weak global demand for south africa ’ s exports, combined with the impact of low advanced economy interest rates on the exchange rate. the consequent global search for yield contributed to the appreciation of the currency for an extended period until around april 2012 which negatively affected south africa ’ s competitiveness. this adverse trend was reinforced by domestic factors including higher input costs of electricity, transport and labour, as well as a decline in the terms of trade since 2010. these factors contributed to the widening of the current account of the balance of payments from 2, 8 per cent of gdp in 2010, to 6, 4 per cent in the second and third quarters of 2012. the value of merchandise exports declined by 6, 6 per cent between the fourth quarter of 2011 and the third quarter of 2012, while the value of merchandise imports increased by 4, 4 per cent. net exports have contributed negatively to recent growth. south africa has been seen as a particularly attractive investment destination because of its well - developed financial system, including its foreign exchange and capital markets. furthermore, the depth and liquidity of the foreign exchange market, with a daily turnover of about us $ 17 billion, made it attractive for hedging emerging market risk, which contributed to the volatility of the exchange rate. while other emerging markets were implementing measures to stem these inflows, such measures were not seen to be appropriate in the south african case given these structural features. although we did not intervene directly to prevent the appreciation, we did take advantage of these circumstances to add to our holding of foreign exchange reserves, with gross reserves increasing from us $ 34 billion in 2008 to current levels of around us $ 50 billion. for most of the 2000s, portfolio investment into south africa was dominated by equity inflows, while inflows into the bond market were relatively small. however, as emerging economy bond markets became more attractive, this pattern changed. inflows into the bond market were given additional impetus with south africa ’ s inclusion in the citibank world government bond index in 2012, when bond flows totaled r88 billion ( compared with r47 billion in 2011 ), more than offsetting a net outflow of equities