, interest rates and growth in the major economies. these concerns, combined with a state of general nervousness about the fairly sharp increases recently in the prices of riskier assets such as equities and commodities, caused many investors to pause, take profits, square positions and generally adopt a lower - risk investment strategy. the increased risk aversion of global investors was reflected in a number of indicators : the volatility index of the chicago board of exchange ( or the vix ), which gives a general reflection of risk aversion in equity markets, doubled from just below 12 on 10 may to almost 24 on 13 june. prices of foreigncurrency denominated bonds of emerging markets also fell, contributing to an increase in the spread of these bond yields over us treasuries. the jpmorgan embi plus spread widened from 176 on 10 may to 232 on 13 june. the widening in spreads occurred across all the sub - indices of the embi plus, with latin america the most affected. south africa ’ s spread widened relatively less, from around 80 in mid - may to around 90 in mid june. the initial sell - off of higher - risk assets commenced in the us equity markets on 11 may following increased market uncertainty regarding the outlook for global interest rates. a marked decline in the s & p 500 index was followed by similar trends in the equity markets of europe, japan and the uk. by mid - june, all the year - to - date gains in most of the major equity markets had been wiped out. equity prices in some emerging markets were even more affected. the south african equity market, which is dominated by the resources sector, declined by over 16 per cent from its peak reached in mid - may. a number of emerging - market currencies depreciated markedly. since 11 may until mid - june, the turkish lira depreciated by over 16 per cent and the brazilian real by almost 11 per cent. the rand has not fared any better, having depreciated by almost 13 per cent over the same period. as is normally the case whenever investors cut their emerging - market exposures, the liquid south african market has been more severely affected than most of its peers. the rand exchange rate is strongly influenced by commodity prices, which in turn are dependent on global growth and also by the deteriorated sentiment towards emerging markets. commodity markets also felt the effects of the sell - off of riskier assets. the price of

ratios so that existing volatility, although very large, is unlikely to precipitate any systemic credit events in emerging markets. this is in contrast to the asian crisis in 1997 / 98, which was generated by imbalances originating in emerging markets. these recent trends have also left their mark on the south african financial markets. however, not much has changed fundamentally in the domestic economy, and there still seems to be significant appetite for south african financial assets, albeit with a somewhat higher risk premium being priced in. although south africa is not a current account surplus country, our low level of foreign indebtedness, both public and private, and improved international reserves position, in conjunction with upgrades from credit rating agencies in the past two years, means that we are likely to be less vulnerable to balance sheet effects that have characterised previous emerging market crises. 3. the growth outlook from a broader perspective, the above suggests that although a period of heightened volatility and uncertainty may ensue, there should be no undue negative impact on south africa ’ s growth prospects. in 2005 and 2005 the south african economy grew at a robust pace of 4, 5 per cent and 4, 9 per cent respectively. growth in 2006 is expected to be moderately lower than that achieved last year following the 4, 2 per cent measured in the first quarter of this year. this is in sharp contrast to the 3 per cent average annual growth experienced between 1994 and 2003. the recent strong growth performance has been underpinned by strong consumer demand which grew at annual rates of 6, 5 per cent in 2004 and 6, 9 per cent in 2005. sustaining growth at higher levels will require significant structural reforms and an increase in investment relative to consumption as a contributor to the growth process. gross fixed capital formation has been growing at annual rates of over 8 per cent for the past three years, driven mainly by private sector investment. in recent years, however, parastatal and public sector investment growth has been extremely low, which accounts for the relatively modest ratio of gross fixed capital formation to gdp of 16, 8 per cent in 2005. this ratio has however been on a rising trend since 2002. as you may be aware, the south african government has embarked on the accelerated and shared growth initiative of south africa ( asgisa ), with the intention of raising the gdp growth rate to around 4, 5 per cent until 2009 and 6 per cent thereafter. central to this strategy is a strong focus on infrast