##bilities relatively under control. while the ratio of external debt to gdp has risen from a low of 18 % in the mid - 2000s to 46 % as at the first quarter of 2018, the majority ( about 55 % ) of that debt is denominated in rand, and includes government bonds held by offshore portfolio managers. importantly too, the short - term component of foreign currency - denominated external debt did not exceed 8. 5 % of gdp, and the bulk of these liabilities consists of either trade finance or domestic banks ’ foreign currency deposits, which in the latter case are more than offset by foreign currency assets. inflation patterns do not appear to be the cause of the market sell - off. over the past 12 months, consumer price readings have been below consensus expectations seven times ( including in the past month ), and the average inflation rate ( of 4. 4 % ) for the second quarter also fell short of what the south african reserve bank ’ s ( sarb ) model projected 6 or 12 months earlier. the extended period of sub - par growth in demand appears to be limiting the pass - through to prices of higher input costs, including those related to exchange rate depreciation. indeed, recent survey indicators suggest that companies ’ pricing power, especially in the retail sector, is increasingly being eroded. at the same time, some modest signs of slower wage and unit labour cost growth have also emerged in the past year or two. however, some several of south africa ’ s fundamentals are fragile enough to keep the country at risk of portfolio flow reversals in periods of rising risk aversion. among those is the persistence of ‘ twin deficits ’. while the current account deficit has declined, on average, in recent years – it stood at 3. 3 % of gdp in the second quarter of the year, down from a high of 5. 8 %, on average, in 2013 – it nonetheless appears elevated for an economy with weak demand and a negative output gap. domestic savings remain low, illustrating the risk of renewed deficit widening if demand, especially muchneeded investment demand, picks up. at the same time, the budget deficit has remained in excess of 3 % of gdp in the past few years, despite repeated tax increases, resulting in a continued rise in the debt - to - gdp ratio, compounded by an increase in contingent liabilities linked to state - owned enterprises. real economic growth has also been disappointing. at a year - on - year growth rate of

if there are signs of the orderly functioning of markets being threatened, rather than to go against the grain of a market, which is realigning and repricing on the back of the factors mentioned above. recent developments in domestic foreign exchange markets have not been judged to have been of such magnitude and nature that they required any intervention from the sarb. challenges in the rest of sub - saharan africa a changing global environment is equally as important for the rest of the african continent. a decade or so ago, the conventional view was that, apart from the demand for exports and the impact of commodity price fluctuations on the terms of trade, african countries were relatively insulated from global financial shocks, as their economies were less integrated into the world financial system and thus less vulnerable to portfolio outflows or cutbacks in banks ’ cross - border loan portfolios. this proved true, to some extent, in the global financial crisis, when the sub - saharan african region experienced a less pronounced growth downturn than other major regions. however, this too is changing. greater integration of sub - saharan africa into global financial flows has brought access to new resources for the financing of investments and economic development. it has also, however, ushered in a greater vulnerability to potential capital outflows. so far this year, with a few exceptions, currencies in sub - saharan africa have depreciated by only a moderate amount against the us dollar. the recovery in oil prices appeared to help energy exporters, while other countries benefitted from continued, relatively stable economic growth. however, other segments of their financial markets have not performed as well. in particular, yields on eurobonds – which have grown in size as a funding instrument in recent years as sovereigns took advantage of the global ‘ search for yield ’ – have increased. in most cases, such yields are up by 100 to 150 basis points from early 2018 lows, reversing a significant part of the previous two years ’ rally. at the same time, ‘ frontier ’ equity markets are displaying a stronger correlation with larger emerging markets than before, illustrating the vulnerability of earlier gains in still - small african stock exchanges. furthermore, several fundamental economic trends in sub - saharan africa are a growing source of vulnerability. current account imbalances are rising in a majority of the continent ’ s countries, which are largely non - resource exporters, and contributing to a rising trend in external liabilities relative to gdp. government budget deficits remain fairly high