gill marcus : outlook for the south african economy against the background of global economic developments address by ms gill marcus, governor of the south african reserve bank, at the dinner in honour of ambassadors and high commissioners to the republic of south africa, pretoria, 2 october 2014. * * * your excellencies, ambassadors, high commissioners, counsels and diplomats, good evening. thank you for kindly accepting our invitation to this dinner, which is becoming a firm feature of the annual diplomatic calendar. we live in an interconnected world, and the lessons of the past few years show the need for cooperation and collaboration. the global financial crisis impacted in some way on most economies, and we are still feeling the effects as the recovery continues in a hesitant manner. and the nature of the recovery in smaller economies such as south africa is shaped, to an important degree, by the speed and nature of the recovery in advanced economies. this evening i will give a brief overview of how we see the global economy evolving and then focus on the outlook for the south african economy in the challenging global and domestic context. for some regions in the world, the past year has been better than the previous one, though the recovery is far from assured or complete. the united states is projected to grow strongly, especially in the second half of this year. after gaining momentum for several quarters, japan ’ s growth seems to have faltered. china has been able to maintain growth above 7 per cent despite a significant economic and political transition. the uk economy is accelerating, with unemployment rates continuing to fall. growth has improved in india, buoyed by a new optimism since the elections. despite lower commodity prices, growth on the african continent remains robust. most emerging markets have weathered the turbulence caused first by “ taper talk ” and then by actual tapering, which is likely to conclude this month. the eurozone is the key exception. peripheral europe is experiencing positive growth, albeit at a low level. the germany economy, however, contracted in the second quarter while growth in france remained at around zero. the eurozone remains a significant market for south african exports. low european inflation and the risk of deflation point to weak potential gdp growth with structurally weak demand across the monetary union. after a period of relative calm in financial markets, volatility has increased recently, with the key trends being the strength of the us dollar, a weakening euro and lower commodity prices. considerable risks and imbalances in the global economy remain and policy makers have

we remain vigilant. the challenges posed by african bank ’ s failure raises several policy questions that are of relevance for many countries in the world. how do we define financial inclusion in a developing country context? for many, financial inclusion refers to the ability to access credit. while access to credit is important, surely financial inclusion should also focus on enabling poor households to accumulate assets, transact efficiently and insure against the normal risks associated with everyday life. south africa will continue to take steps to promote financial inclusion but we will not tolerate unhealthy lending practices or excessive risk - taking in the financial sector. the second policy challenge that african bank has brought to the fore is the degree to which the financial sector and the banking system in particular is interconnected and interdependent. this is a difficult balance to strike because, from an individual bank or company perspective, inter - dependencies reduce risk. however, from a system perspective, interdependencies increase risk. we all have much to learn about how we promote financial deepening and integration but protect the system against systemic risk. as a reflection of our commitment to enhance a sound and effective financial sector, and learn from the global crisis, south africa ’ s adoption of a “ twin peaks ” regulatory framework will be formalised in the course of the next year, with legislation setting out the roles and responsibilities of all parties in the financial regulatory architecture. this legislation draws on both international and our own experiences, creating a prudential authority with the bank, and a market conduct authority that will take the place of the financial services board. in conclusion, the world economy is in a better position than a year ago, but the crisis is not over and significant risks remain. global trade is rising, after stagnating for several years. notwithstanding a withdrawal of liquidity in some advanced economies, financial flows continue to impact on emerging markets. 2014 flows to south africa have been volatile and at an elevated price, with september seeing significant outflows such that year to date flows are negative at some r22bn. experts are beginning to talk about prices of several commodities reaching the bottom, with the potential for a period of either stability or modest price increases going forward. these trends should support growth going forward in subsaharan africa, particularly given the significant discoveries of oil and gas. on the other hand, geopolitical factors continue to affect growth in europe, the middle east and north africa. the keenly contested scottish independence