##phazard fiscal contraction. the possible headwinds from this could be quite significant and pose a risk to the sustainability of the recovery. ironically, a rapid us recovery poses other risks, as we have seen in the past few weeks arising from the possibility of an earlier - than - expected reduction in quantitative easing. there is not only uncertainty about the timing of this reversal, but also of the implications for capital flows and bond markets in emerging markets. global factors are again coming to the fore, particularly in the market overreaction to the federal reserve ’ s possible tapering off of qe, which it has clearly stated that should this commence, will be done very slowly and would be highly conditional. this is affecting many emerging markets. for instance, since late april both the brazilian real and the mexican peso have depreciated by between 6 and 7 per cent against the us dollar. so part of what we have seen in the rand depreciation can be attributed to the question of qe expectations. at the same time, although the risks of a break - up of the eurozone have receded significantly following the announcement of support measures by the ecb in the form of the ( still unused ) outright monetary transactions, the growth outlook has deteriorated further. the recent oecd report suggests that the eurozone will contract by 0, 6 per cent this year, and only grow by 1, 1 per cent next year. although the uk shows tentative signs of recovery, it is still bis central bankers ’ speeches very weak. a big question mark hangs over japan, as it remains unclear how the recently implemented stimulus packages will impact on the real sector. systemically important emerging markets such as brazil, india and china have slowed. in particular, the slowdown in china and the shift from fixed investment towards domestic consumption has contributed to lower global commodity prices, negatively affecting south africa ’ s export earnings. there has been increasing attention paid to many parts of the african continent, which is expected to maintain a growth rate in excess of 5 per cent for the next few years. but all in all, there is a very difficult export environment for south africa. this difficult trading backdrop is only part of the challenge facing the domestic economy. although the economy recovered relatively quickly from the 2009 recession and grew by 3, 1 per cent 3, 5 per cent in 2010 and 2011 respectively, growth moderated to 2, 5 per cent in 2012 and since the crisis has lagged that of our emerging market peers

structural reforms. this inability to do so creates unreasonable expectations for monetary policy to achieve objectives that it is not competent to deliver. ultimately it could lead to an undermining of central bank credibility and institutional strength, even in those areas where it is best suited to operate. the exchange rate and competitiveness as i mentioned earlier, when people think about global competitiveness, the exchange rate immediately comes to mind. central banks talk about the exchange rate and global competitiveness, we are referring to the real exchange rate, or the nominal exchange rate adjusted for inflation differentials between south africa and its trading partners. a depreciation only improves competitiveness if it is not eroded by higher inflation. in other words, if it is a real depreciation. so the bank ’ s contribution to keeping inflation low is relevant in this respect. our constitutional mandate to protect the value of the currency is often interpreted as a mandate to keep the nominal exchange rate stable. in the absence of other shocks, the exchange rate should remain stable if our inflation rate is the same as that of our trading partners. but assuming our inflation rate is higher and we attempt to maintain a stable exchange rate ( and assuming that we have the means to do that ), our real exchange rate will in fact be appreciating. in other words, we will be losing competitiveness, as the cost of producing goods domestically will have increased relative to our competitors. this persistent overvaluation of the currency will not be sustainable. since the beginning of 2011, the real effective exchange rate has depreciated by 26, 8 per cent, in contrast to the nominal effective depreciation of 41, 9 per cent. so on this measure we are more competitive, but we have not seen a strong adjustment to this, as evident in the persistent current account deficit. there are a number of possible explanations but i will highlight a few points. it is important to understand what the key drivers of the depreciation have been. while there are a whole range of factors that impact the rand on a day to day basis, terms of trade changes and capital flows have been among the key underlying drivers or determinants. falling commodity prices since 2011 have been an important factor in the weakening of the rand. this does not necessarily provide an impetus for increased production of commodities, but rather it shields the rand value of mining output. it does make non - mining exports more attractive, and that is how the adjustment is supposed to work. in other