Governor Lesetja Kganyago: Ninety-eighth Annual Ordinary General Meeting of South African Reserve Bank Shareholders

An address by Lesetja Kganyago, Governor of the South African Reserve Bank (SARB), at the Ninety-eighth annual Ordinary General Meeting of the SARB shareholders, South African Reserve Bank, PretoriaDear GCIS newsroom,This past year was, to some extent, one of contrasting halves. The second half of 2017 saw a generally constructive global backdrop for South Africa and other emerging markets.

The recovery in the advanced economies continued at a steady pace, with most showing signs of sustained growth. In the United States (US), growth was above the estimated potential, and unemployment continued to decline.

Economic activity in the euro area surprised on the upside after a protracted period of sluggish growth. A notable exception to this trend was the United Kingdom, where growth prospects were adversely affected by the uncertainty arising from the decision to leave the European Union.

There were also indications that, while the withdrawal of monetary policy stimulus was likely to continue in the advanced economies, the policy tightening cycle was expected to be moderate. These settings remained supportive of strong capital flows to emerging markets.

Stronger demand underpinned higher commodity prices, reinforced by strong growth in China.This favourable setting did not last long into the first half of 2018. Expectations of a faster pace of monetary tightening than previously expected began to emerge as the strong US growth was sustained.

The US unemployment rate reached levels below the estimated natural rate, while fiscal policy became more expansionary. This put upward pressure on long-term US Treasury yields, which exceeded 3% for the first time since July 2011. Surprisingly, US inflation remained stubbornly below the target of 2% in the absence of significant wage growth.

The recent communications of the Federal Open Market Committee appear to have reinforced the likelihood of a tighter stance, which in turn has sustained US dollar strength.By contrast, growth in the euro area and Japan slowed, leading to a reassessment of expectations of early withdrawal of monetary policy accommodation in these regions.

In addition, the strong dollar effect dominated global markets, which saw a reversal of capital flows from emerging markets, reminiscent of the so-called taper tantrum in 2013. While most emerging markets are assessed to be more resilient to these developments than was the case at that time, their exchange rates and bond yields have come under pressure, although experiences have differed widely.Two other developments overshadowed the global environment in the first half of 2018. First, while most commodity prices declined during the first half of this year, the international oil price continued what seemed to be an inexorable ascent.

This was driven to a large degree by the successful implementation of the agreement to restrict output by the Organization of Petroleum Exporting Countries (OPEC) and some non-OPEC countries. The result was a steady increase in the price of Brent crude oil, from US$50 per barrel in July last year to around US$80 by June this year.

Although some moderation has been evident recently, the outlook remains uncertain, with mixed views by analysts in this regard. To date, the impact on domestic petrol prices and on inflation has been significant.

The second development was a marked escalation in the changes to US trade policy. Initially, tariff increases were focused primarily on China, but have subsequently been broadened to encompass some traditional allies of the US as well.

It is still unclear whether these actions and countervailing reactions will evolve into a full-blown trade war. However, the rise in protectionism has already had a moderating impact on the optimism for global growth, and has also already contributed to risk-off scenarios in global financial markets.

Of concern is that the sharp contraction in world trade that was recorded in April would be protracted. This was the worst performance in world trade since May 2015.The net result of all of these recent global developments has been a generally deteriorating environment for emerging markets.

During the second half of last year, the domestic economic outlook was overshadowed by heightened political uncertainty in the lead-up to the African National Congress (ANC) elective conference...