t t mboweni : a review of economic and financial developments in south africa during 2002 address by mr t t mboweni, governor of the south african reserve bank, at the dinner for heads of foreign missions, pretoria, 10 december 2002. * * * mr el - herfi, acting dean of the diplomatic corps, ambassadors, high commissioners, heads of international organisations, senior management of the department of foreign affairs, senior management of the reserve bank and honoured guests, all protocol observed 1. introduction integrating dinner with discussions of finance is not unfamiliar to central bankers. the key ingredients are good food and brevity and relevance of the discussion. i will do my best to adhere to the latter two ingredients. the former is out of my hands. 2. the global economy in 2002 the developed countries were already experiencing a slowdown in economic activity in 2001 when the events of 11 september shocked the world. transport and tourism in particular were hit very hard, with some fallout continuing to this day. world growth in 2002 has been subdued and for the full year is expected to amount to around 2, 8 per cent, slightly better than the 2, 2 per cent recorded in 2001 but still way below the 4, 7 per cent recorded in 2000. alongside the uninspiring growth performance, however, inflation has been very low. in japan prices are in fact falling, while in the euro area the latest average inflation rate is 2, 2 per cent. in the united states, inflation is running at 2, 0 per cent. beyond the lacklustre world growth and low inflation, there were a number of key events in 2002. argentina's one - to - one peg of the peso to the american dollar, that had led to a significantly overvalued peso, collapsed. against the one - to - one rate at the end of last year, the current exchange rate is 3, 54 peso per dollar. the argentinian economy has been contracting, while their inflation rate has accelerated to more than 40 per cent. brazil experienced some problems, partly related to the country's high government debt and its linkages with troubled argentina. imf funding is helping to soften the adjustment process. in the northern reaches of the american continent, the demise of enron led to disillusionment with corporate governance and accounting practices. this has led to a greater awareness of the need for sound structures and practices, revised codes of conduct and a sharpening of regulation. and

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.