african countries to withstand the effects of the crisis better than during previous crises. the main risk facing africa remains a stalling of the global economic recovery. this could place downward pressure on commodity prices, which could also undermine government revenues and raise public debt to unsustainable levels. in south africa, economic performance started improving in the third quarter of 2009 and continued at a markedly stronger pace in the fourth quarter, as the economy gradually emerged from the recession. confidence in the financial services sector increased further in the fourth quarter of 2009, boosted mainly by higher levels of confidence among investment managers and life insurers. the banking sector continued to maintain levels of capital well above the minimum prudential requirement. despite the recovery in real economic activity, bank loans and advances contracted during the period under review. the contraction in credit extension had both demand and supply - side elements. on the demand side, it would appear that households continue to be reluctant to incur more debt, while on the supply side lending standards have remained tight. although credit losses had been increasing consistently over the past two years, the pace of deterioration in the asset quality of banks moderated during the second half of 2009. banking profitability dropped somewhat during the second half of 2009, but efficiency has remained fairly stable over this period. the financial strength of long - term insurers in south africa was assessed as being generally sound, based on the capital - adequacy levels. other financial soundness indicators for typical long - term insurers, however, suggest that this sector continued to experience some strain. financial conditions in the short - term insurance sector also deteriorated during the fourth quarter of 2009. in line with developments in international equity markets, the upward trend in the domestic equity market, which started in march 2009, continued in the second half of the year. business confidence increased in the fourth quarter of 2009, following persistent declines since the third quarter of 2006. the improvement in business confidence is consistent with some of the other leading indicators that generally precede a recovery in economic activity, and currently herald an improvement in economic conditions. other indicators for the corporate sector, however, confirmed that the sector was still under pressure. confidence in the residential property market also showed some signs of recovery. in addition, the decelerating growth in mortgage advances, as reported by banks, bottomed out in december 2009 and started to show signs of an upward trend. the business operations of non - residential building contractors were, however, still constrained by a

environment had a lot more to do with this narrowing, along with sluggish loan demand. historically low interest rates have significantly reduced the yields banks earn on their assets, especially mortgages. banks built up their holdings of mortgages as market conditions generated such remarkable volumes of these loans, and as weak demand for commercial loans left a void in bank balance sheets and income. historically low rates on new mortgage loans, together with rapid prepayment of higher - rate mortgages, have sharply reduced yields on bank mortgage portfolios. the preliminary data for 2003 indicate that the effective yield on mortgage - backed securities, including adjustable - rate products, fell to 4. 22 percent ; by late in the year, yields had fallen to only about 3. 90 percent. along with this pressure on yields, banks have faced an interesting new pressure on funding costs. for much of the last two years, households have been inclined to keep their assets very liquid and flexible. interest rates have been low by historical terms, and didn't seem to provide much incentive for households to tie up their assets in time deposits. the stock market - at least through the spring of last year - was on a downward track and certainly not providing attractive returns. flexible bank deposits offered a comfortable compromise, providing positive returns, deposit insurance, and flexibility to redeploy funds if alternative investments became more attractive. in this setting, bankers have valued core deposits even more highly, and have paid up for them. in particular, they have favored nonmaturity deposits such as money market or savings accounts. smaller - denomination certificates of deposit, in contrast, have declined steadily over a period of some years. influenced by the low interest rate environment, banks reduced the rates on their nonmaturity deposits by far less than money market rates had fallen. the result has been tighter margins, but with an important potential side benefit. the success that bankers had in raising these nonmaturity deposits created opportunities to reclaim some of the market share that bank deposits had lost over the previous decade or two. money market and savings accounts, in particular, now fund 30 percent of bank assets. remarkably, despite these pressures, it now appears that bank margins recovered to some degree late in 2003. the improvement was only about six basis points, but appears to be significantly influenced by slower prepayments and the resulting increases in mortgage asset yields. there were a host of other forces at work, suggesting that the improvement in margins may or may not be sustainable. still, banks