t t mboweni : annual conference on global imbalances, competitiveness and emerging markets address by mr t t mboweni, governor of the south african reserve bank, at the cepr / esi 11th annual conference on global imbalances, competitiveness and emerging markets, pretoria, 28 september 2007. * * * distinguished delegates this is the eleventh year that representatives from the academic world and central banks across the world meet to discuss topics that are very relevant in the prevailing macroeconomic environment. on this occasion, the organisers have selected the issues of global imbalances, competitiveness and emerging markets. from the programme, it is clear that we can look forward to some interesting views and insights into these issues. in my keynote address, i will focus on a few aspects relating to central banks, in particular in emerging - market countries, and the challenges faced in formulating and implementing monetary policy in a globalised financial system characterised by imbalances. when referring to global imbalances, the most obvious ones that spring to mind are the us twin deficits and global trade imbalances, which have probably been the most publicised imbalances over recent years. yet the world is characterised by many other imbalances. some of these are embedded in the structure of the world economy as it has developed over the centuries, such as the income gaps between developed, underdeveloped and emergingmarket countries. others are more cyclical in nature. the current fallout in the us sub - prime market is an example of a reaction to a more cyclical imbalance caused by low interest rates, high liquidity and a general under - pricing of risk over recent years. cyclical balances are normally restored through a combination of policy adjustments and market forces. however, this can be a painful process, as many financial institutions, investors and sub - prime mortgage lenders and borrowers that were directly affected by the recent events in global credit markets can bear witness to. another example of a current cyclical imbalance is the extent of carry trades and build - up of long / short investment positions globally, which resulted from loose monetary policy in some countries and tighter policy in other countries, mostly emerging - market countries. this has enticed investors to borrow in the low - interest - rate currencies and invest in the high - yield currencies. most cyclical imbalances result from the boom and bust characteristics of the global economy and financial markets. in his last

or overreact to boom and bust cycles. many of the global imbalances in the world today can be related to the process of globalisation, which facilitated almost unlimited cross - border flows of funds. the wave of financial globalisation and innovation that has flooded over financial markets during the past two decades has also complicated the formulation and implementation of monetary policy. i would like to also make a few comments in this regard. globalisation has been brought about by a number of factors, including : - the increasing free flow of capital across national borders ; - the emergence of global financial institutions ; - a technological revolution that made geographical location almost irrelevant ; - an explosion of new financial instruments ; and - new insights and developments in the areas of asset management and risk management. these developments facilitated the significant cross border flows that emanated from global savings imbalances and a search for higher yields at a time when interest rates in developed markets were low. emerging markets have been affected by these changes in very particular ways. emergingmarket assets have increasingly become an acceptable and desired asset class in diversified global portfolios, recognised as both yield - enhancers and risk - reducers through diversification. this is partly attributable to the improved macroeconomic and financial profiles of many emerging markets. on the one hand, this appetite for emerging market assets has contributed to a steadier and more sustainable flow of funds to emerging markets : once accepted as part of an investment mandate, certain portions of portfolios are allocated to these assets for longer periods. on the other hand, large inflows of capital relative to the size of domestic financial markets have a significant impact on domestic asset prices, volatility, liquidity and external vulnerability. domestic asset prices become very sensitive to changes in sentiment or risk appetite among global investors. significant foreign investment flows to emerging markets have also to some extent contributed to imbalances between domestic and foreign assets and liabilities. countries that have received large amounts of inflows, while enjoying the benefits of these, should always keep in mind that they are also building up increasing foreign liabilities, which are likely to affect future outflows of dividends and interest payments. this holds equally true for foreign direct investment and portfolio investment. there is also an ever - present risk that foreign investors could withdraw again if the global environment changes. south africa is a classic example of a country with such an exposure, and it is precisely for this reason that the south african reserve bank has used the