##preciate? south africa ’ s reserves, at just over usd42 billion, are relatively low for that type of exercise. furthermore, pegging the rand to the us dollar would not imply an automatic peg to other currencies, such as the eur, which is the currency of our biggest trading partner bloc. pegging also has the problem that if prices and wages are increasing, any competitive advantage will soon be eroded and there will be calls for changing the peg. aggressive reserves accumulation either in the context of a peg or to prevent or moderate appreciation also carries significant costs, given the wide interest rate differential between the interest paid on sterilization and the interest earned on reserves. this results in a negative cost of carry and places the bank ’ s income position at risk. the bank recorded a loss of approximately r1, 0 billion during the 2009 / 10 financial year. it is however important to point out that this loss was incurred as a direct result of the bank executing its public policy responsibilities rather than owing to any inappropriate risk taking or wasteful expenditure. over the past year, the bank continued to purchase foreign exchange as part of its strategy to steadily increase the level of foreign exchange reserves. gross reserves increased by approximately usd8, 0 billion from april 2009 to usd42, 3 billion in april 2010. the international liquidity position increased by usd5, 0 billion to usd38, 5 billion over the same period. apart from foreign exchange purchases by the bank, this increase in official reserves was also due to foreign currency deposits from government, the allocation by the imf of sdrs to south africa and valuation adjustments. although valuation adjustments contributed positively to reported usd official reserves over the financial year, there were periods where the bank published substantial declines in the level of reserves due to valuation losses stemming from the diversified nature of reserves in terms of currencies. the financial markets department continued to enhance reserves management policies in order to adjust and streamline our investment strategies. the investment policy, which provides a strategic and operational framework for reserves management, was reviewed during 2009 / 2010. the investment policy is reviewed every three years for governance purposes and also to ensure that it is responsive to and keeps pace with changes in the reserves management activities of the bank and the external environment. the recent global financial crisis provided an ideal opportunity to incorporate into the policy the lessons learned, while also aligning the policy with refinements to international best practice. conclusion the turmoil experienced in the euro zone with regard to sovereign

emerge from the recent revision of the u. s. national income data is that, in recent quarters, household saving has been higher than we thought – averaging near 6 percent of disposable income rather than 4 percent, as the earlier data showed. 3 on the one hand, this finding suggests that households, collectively, are even more cautious about the economic outlook and their own prospects than we previously believed. but on the other hand, the upward revision to the saving rate also implies greater progress in the repair of household balance sheets. stronger balance sheets should in turn allow households to increase their spending more rapidly as credit conditions ease and the overall economy improves. household finances and attitudes also bear heavily on the housing market, which has generally remained depressed. in particular, home sales dropped sharply following the recent expiration of the homebuyers ’ tax credit. going forward, improved affordability – the result of lower house prices and record - low mortgage rates – should boost the demand for housing. however, the overhang of foreclosed - upon and vacant housing and the difficulties of many households in obtaining mortgage financing are likely to continue to weigh on the pace of residential investment for some time yet. in the business sector, real investment in equipment and software rose at an annual rate of more than 20 percent over the first half of the year. some of these gains no doubt reflected spending that had been deferred during the crisis, including investments to replace or update existing equipment. consequently, investment in equipment and software will almost certainly increase more slowly over the remainder of this year, though it should continue to advance at a solid pace. in contrast, outside of a few areas such as drilling and mining, business investment in structures has continued to contract, although the rate of contraction appears to be slowing. although most firms faced problems obtaining credit during the depths of the crisis, over the past year or so a divide has opened between large firms that are able to tap public securities markets and small firms that largely depend on banks. generally speaking, large firms in the most recent survey is available on the board ’ s website at www. federalreserve. gov / boarddocs / snloansurvey. data are from the national and income product accounts produced by the bureau of economic analysis, u. s. department of commerce. good financial condition can obtain credit easily and on favorable terms ; moreover, many large firms are holding exceptionally large amounts of cash on their balance sheets. for these firms,