Date: 11/10/2002 Source: SA Reserve Bank Title: Mboweni: Dinner for
heads of branches & representatives of international banking
institutions
STATEMENT BY MR TT MBOWENI, GOVERNOR OF THE SOUTH AFRICAN RESERVE BANK, ON THE OCCASION OF THE DINNER FOR HEADS OF BRANCHES AND REPRESENTATIVES OF INTERNATIONAL BANKING INSTITUTIONS, Gallagher Estate, 11 October 2002
Ladies and Gentlemen
INTRODUCTION
It is indeed a pleasure welcoming you all here this evening. Thank you for accepting our invitation and for honouring us with your presence in large numbers. A particular warm welcome to the partners and spouses of heads of branches and representatives of international banking institutions in South Africa. When organising functions such as this one to express our appreciation for the support we received from your partners and their institutions over the past year, we would like you to know that we are aware of the fact that you are part and parcel of such support. I am only sorry that we were not able to host this event at the Reserve Bank given the fact that our building operations are not complete. We will be back there next year.
The ambience of this occasion is greatly improved by having partners present but there is an added advantage for all of us - myself included - namely that only a very brief economic or financial commentary is probably the order of the day.
BRIEF COMMENTS ON ECONOMIC MATTERS
As we gather here today, the world is characterised by uncertainty and a deteriorating outlook for the world economy, evidenced by sluggish domestic demand in major industrial countries, continuing decline in global equity markets amid corporate governance scandals, concerns about developments in Brazil and their implications for emerging markets as well as fears about war breaking out in Iraq, with expected negative consequences for the oil price. In our own region we are facing a problem of famine.
Against this fairly gloomy background, we are grateful that the economic situation in South Africa has held up quite well in the first half of 2002, with GDP growing by 2.0% and 3.1% in the first and second quarter respectively. This growth was supported by a particularly good export performance, allowing us at least to register some benefits as a country from the adjusted value of the rand.
Unfortunately, the other side of the coin of rand depreciation has been that inflationary pressures started building up, second round effect became visible and inflation expectations have risen to well above the upper level of the inflation target range. The factors just mentioned, together with others, such as the growth in money supply, led to the Reserve Bank's decision to increase interest rates on four occasions this year. Whilst it is acknowledged that exogenous factors have played a significant role, monetary policy simply cannot be complacent in the wake of these adverse developments for our inflation outlook. Monetary policy needs to be vigilant to ensure that a temporary problem does not become protracted and end up being to the detriment of sustainable non-inflationary growth.
I think it worth reminding ourselves that the pursuit of price stability (or low inflation) is therefore not an end in itself, but is the means whereby monetary policy can contribute to sustainable economic growth and development.
INFLATION OUTLOOK
Despite the continued rise in consumer and production inflation the inflation outlook has improved significantly. The consensus forecast of most economists and market analysts is that inflation will reach a peak in the fourth quarter of this year and then slow down quite rapidly during the course of next year. These forecasts are based on the restrictive monetary policy stance that the authorities have adopted since January 2002 and the continued fiscal discipline that has been applied.
A number of other factors also favour a decline in inflation, such as no signs of excess demand in the domestic economy, excess production capacity, an undervalued exchange rate of the rand and the fact that international inflation pressures have become even more subdued.
The Reserve Bank's latest projection for CPIX-inflation also suggests that inflation will peak above the 10 per cent level during the fourth quarter of 2002. This, of course, might imply that the inflation target of 3 to 6 per cent for the calendar year 2002 might not be achieved.
As soon as all the information for calendar 2002 has become available, the Bank will comment on the inflationary path going forward. The Bank's projection further indicates that CPIX-inflation will decline to below the 6 per cent upper limit of the target range by the second half of 2003. As with all projections, there are nevertheless serious risks that some of the assumptions on which they are based may not be realised.
The major risk to this forecast is the current tension surrounding Iraq and the effect that this could have on oil prices. In the case of a war it is generally expected that oil prices could rise sharply, in which case this will throw our assumptions into disarray. A stronger or weaker than expected performance of the exchange rate would also add to the risk that the actual CPIX-inflation outcome may be below or above the central projection.
The outlook remains significantly improved.
CO-OPERATION WITH INTERNATIONAL BANKS
The highlight of our co-operation this year was again the conclusion of another syndicated loan.
You are all very well aware of the success of this syndicated loan. The facility documentation was signed in London on 9 July 2002. We are truly delighted by the quality of names we have on the tombstone and the degree to which the amount on offer was oversubscribed - I believe that in excess of USD1,7 billion was committed.
Perhaps most pleasing about the transaction was the very positive signal, which is being sent to the international investment community about South Africa. Against the background of a transaction-period characterised by risk aversion and some turbulence in the world financial markets, the relatively short period of time in which the transaction was concluded not only bears testimony to strong banking relationships, but also represents a clear vote of confidence in the soundness of the country's fundamentals and its management of fiscal and monetary policies. It is indeed noteworthy that fifty per cent of the loan has a maturity of five years. This, of course, also establishes a new benchmark for lending to South African financial institutions.
We would once again to thank you for your valued support.
FAREWELL FOR MR G
STATEMENT BY MR TT MBOWENI, GOVERNOR OF THE SOUTH AFRICAN RESERVE BANK, ON THE OCCASION OF THE DINNER FOR HEADS OF BRANCHES AND REPRESENTATIVES OF INTERNATIONAL BANKING INSTITUTIONS, Gallagher Estate, 11 October 2002
Ladies and Gentlemen
INTRODUCTION
It is indeed a pleasure welcoming you all here this evening. Thank you for accepting our invitation and for honouring us with your presence in large numbers. A particular warm welcome to the partners and spouses of heads of branches and representatives of international banking institutions in South Africa. When organising functions such as this one to express our appreciation for the support we received from your partners and their institutions over the past year, we would like you to know that we are aware of the fact that you are part and parcel of such support. I am only sorry that we were not able to host this event at the Reserve Bank given the fact that our building operations are not complete. We will be back there next year.
The ambience of this occasion is greatly improved by having partners present but there is an added advantage for all of us - myself included - namely that only a very brief economic or financial commentary is probably the order of the day.
BRIEF COMMENTS ON ECONOMIC MATTERS
As we gather here today, the world is characterised by uncertainty and a deteriorating outlook for the world economy, evidenced by sluggish domestic demand in major industrial countries, continuing decline in global equity markets amid corporate governance scandals, concerns about developments in Brazil and their implications for emerging markets as well as fears about war breaking out in Iraq, with expected negative consequences for the oil price. In our own region we are facing a problem of famine.
Against this fairly gloomy background, we are grateful that the economic situation in South Africa has held up quite well in the first half of 2002, with GDP growing by 2.0% and 3.1% in the first and second quarter respectively. This growth was supported by a particularly good export performance, allowing us at least to register some benefits as a country from the adjusted value of the rand.
Unfortunately, the other side of the coin of rand depreciation has been that inflationary pressures started building up, second round effect became visible and inflation expectations have risen to well above the upper level of the inflation target range. The factors just mentioned, together with others, such as the growth in money supply, led to the Reserve Bank's decision to increase interest rates on four occasions this year. Whilst it is acknowledged that exogenous factors have played a significant role, monetary policy simply cannot be complacent in the wake of these adverse developments for our inflation outlook. Monetary policy needs to be vigilant to ensure that a temporary problem does not become protracted and end up being to the detriment of sustainable non-inflationary growth.
I think it worth reminding ourselves that the pursuit of price stability (or low inflation) is therefore not an end in itself, but is the means whereby monetary policy can contribute to sustainable economic growth and development.
INFLATION OUTLOOK
Despite the continued rise in consumer and production inflation the inflation outlook has improved significantly. The consensus forecast of most economists and market analysts is that inflation will reach a peak in the fourth quarter of this year and then slow down quite rapidly during the course of next year. These forecasts are based on the restrictive monetary policy stance that the authorities have adopted since January 2002 and the continued fiscal discipline that has been applied.
A number of other factors also favour a decline in inflation, such as no signs of excess demand in the domestic economy, excess production capacity, an undervalued exchange rate of the rand and the fact that international inflation pressures have become even more subdued.
The Reserve Bank's latest projection for CPIX-inflation also suggests that inflation will peak above the 10 per cent level during the fourth quarter of 2002. This, of course, might imply that the inflation target of 3 to 6 per cent for the calendar year 2002 might not be achieved.
As soon as all the information for calendar 2002 has become available, the Bank will comment on the inflationary path going forward. The Bank's projection further indicates that CPIX-inflation will decline to below the 6 per cent upper limit of the target range by the second half of 2003. As with all projections, there are nevertheless serious risks that some of the assumptions on which they are based may not be realised.
The major risk to this forecast is the current tension surrounding Iraq and the effect that this could have on oil prices. In the case of a war it is generally expected that oil prices could rise sharply, in which case this will throw our assumptions into disarray. A stronger or weaker than expected performance of the exchange rate would also add to the risk that the actual CPIX-inflation outcome may be below or above the central projection.
The outlook remains significantly improved.
CO-OPERATION WITH INTERNATIONAL BANKS
The highlight of our co-operation this year was again the conclusion of another syndicated loan.
You are all very well aware of the success of this syndicated loan. The facility documentation was signed in London on 9 July 2002. We are truly delighted by the quality of names we have on the tombstone and the degree to which the amount on offer was oversubscribed - I believe that in excess of USD1,7 billion was committed.
Perhaps most pleasing about the transaction was the very positive signal, which is being sent to the international investment community about South Africa. Against the background of a transaction-period characterised by risk aversion and some turbulence in the world financial markets, the relatively short period of time in which the transaction was concluded not only bears testimony to strong banking relationships, but also represents a clear vote of confidence in the soundness of the country's fundamentals and its management of fiscal and monetary policies. It is indeed noteworthy that fifty per cent of the loan has a maturity of five years. This, of course, also establishes a new benchmark for lending to South African financial institutions.
We would once again to thank you for your valued support.
FAREWELL FOR MR G
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