T Manuel: International Monetary Conference

5 June 2007

Mr Walter Kielhoz
Our host, Mr Jaco Maree
Distinguished guests
Ladies and gentlemen

Thank you for inviting me to address the International Monetary Conference.
This is an intimidating forum with so many bankers, the custodians of so much
of the world's savings, the providers of such a large range of financial
services to clients ranging from governments to multilateral institutions,
multinational corporations to the corner café, investment banks to the guy
selling newspapers on the street corner. The process of evolution away from
simple barter economies to cash, from hoarding monetary value under mattresses
to putting money into a bank, from signing a cheque to entering a pin code is
still very much work in progress.

The process of financial deepening, with increasingly sophisticated products
offered through increasingly diverse mediums is happening apace. For this
reason, the banking system and banks in general have become an integral part of
the genetic architecture of our economies and our societies.

It is a privilege to be able to talk to you today. You were addressed by
President Mbeki on Sunday and he dealt with the complex processes of growth,
development, and globalisation in the context of our shared humanity and an
increasing interconnectedness. He also made mention of the contradiction
between what are clear successes in growth and development alongside rising
inequality, both in terms of income and wealth and in terms of opportunity.

I would like to talk you through a bit of our recent history with respect to
economic policy. Today, South Africa is growing at about five percent a year, a
rate we have been able to sustain for over three years now. We now have rising
employment, increasing living standards, sound fiscal management, a strong
financial sector, robust and respected monetary authorities and strong
institutions of oversight, regulation and law. How did we get here, what was
the path that brought us to this point, and what are the prospects for growth
and development going forward?

In answering these questions, my intention is certainly not to give you the
impression that everything is fine in our economy or that we have reached the
Promised Land. We still have huge economic and social challenges ranging from
high levels of unemployment and inequality, we are still not creating jobs at a
satisfactory pace and we still have institutional weaknesses in our ability to
repair the myriad of microeconomic weaknesses that still hobble our economy.
Nevertheless, it is important for the international financial community to
understand these challenges and to understand the success factors.

Last year, the South African economy grew by five percent, the highest rate
of economic growth in 25 years. After years of rising unemployment, the
unemployment rate has declined for three years in a row, with over a million
jobs created in this period. All the major indicators of economic growth are
showing that the present economic boom represents one of the longest sustained
increases in income in about 40 years. What started off as a consumption boom
has quickly translated into an investment boom, with private sector gross fixed
capital formation now standing at its highest level since our records began,
probably sometime in the 1950s.

This growth has been relatively broad-based with the share of income going
to Africans rising to above 50 percent in 2005, from about 40 percent in 1996.
The number of black people entering what is called 'the middle class' increased
by 30 percent in a single year to 2,6 million last year. This represents a
substantial shift in the purchasing power in South Africa towards the
historically disadvantaged. According to a study by the Department of Trade and
Industry, the number of small businesses has grown by 150 percent since 1995
and 87 percent of these businesses are black-owned. The list of economic
performance and confidence indicators runs a long way.

Our present economic performance is due to two main factors. Firstly, over
the past decade, we have pursued policies that have put the economy on a sound
footing, where it is able to grow faster, sustainably. Secondly, high commodity
and a favourable international economic environment have benefited the South
African economy, at a time when we have opened up our economy.

In the present mood of optimism in the economy, it is difficult to imagine a
time when the economy was much weaker, literally on its knees, I would argue.
In 1994, we inherited an economy from the apartheid government emerging from a
deep recession. In the decade prior to 1994, the economy grew by just one
percent a year. Investment levels had fallen, money was leaving the country at
a phenomenal rate and the agricultural sector was recovering from one the worst
droughts in decades. The country's public finances were in a shambles,
government was running a deficit of over seven percent of Gross Domestic
Product (GDP) and interest costs were approaching 20 percent of the budget.
Inflation was in the high teens and we had almost zero foreign exchange
reserves.

The banking system was strong, but relatively small and isolated from the
rest of the world. It served a small elite and it did this remarkably well.
Millions of people, working people, did not have access to banking and
financial services. Worse than all of these factors, we had a business
community that was convinced that the new government would run the economy into
the ground. This concern was so strong that President Mandela took the step of
appointing as Finance Minister the same person who served immediately prior to
our first democratic elections. When he resigned shortly thereafter, a person
from the banking sector, well known to business, was appointed as Minister of
Finance.

In today's context, this seems an unusual step, but it reflected how
seriously government took the negative perceptions about its ability to manage
the economy.

When many of us were negotiating with the previous government prior to the
1994 elections, we were led to believe that the civil service was an organised,
sophisticated machine able to implement the programmes of government. By 1996,
this myth was shattered. We found a civil service that was inept, and lacked
the capacity to deliver government’s reconstruction and development
programme.

An analysis of the economy showed that the problems were not just cyclical.
The economy was in a deep structural decline and that this decline began in the
late 1970s. Formal sector employment was stagnant from the mid-1980s. Early
signs of trouble appeared in 1996 when a series of rumours around President
Mandela's health led to a fall in the currency. After a few months, the
currency fell at the drop of a hat. Continuous capital flight meant that South
Africa faced a severe balance of payment constraint. Ironically, today, even
with a current account deficit at six percent of GDP, capital markets are still
willing to invest in our country.

South Africa was trapped in a boom-bust cycle. Any increase in economic
growth or in investment led to a rise in imports. A lack of confidence in
capital markets led to a fall in the currency. Partly to stem capital flight
and partly to reduce inflation, interest rates had to be set at very high
levels, further constraining economic growth. South Africa's savings rate fell
below 15 percent of GDP partly as a result of a rising tax burden and a large
government deficit. In 1996, government was borrowing almost R1 billion a
week.

On entering government, we soon realised that small adjustments were not
going to be sufficient to right the ship. Fundamental changes were needed to
ensure that we generated the resources to implement government's social and
developmental programmes over a long and sustained period. In 1996, we launched
Growth, Employment and Redistribution strategy (Gear). Gear set out a range of
policies covering fiscal policy, the labour market, education, skills
development and trade. There is little disagreement that Gear presented a
difficult set of reforms for the economy. In essence, Gear was aimed at putting
the public finances on a more stable footing, reducing the costs to business,
reducing interest rates through lower inflation, increasing investment in
education and in infrastructure.

In a short space of time, we stabilised the public finances. We introduced
inflation targeting, providing a clear anchor for monetary policy. A smaller
deficit and lower inflation expectations played a key role in reducing interest
rates, and lower interest rates have been essential to the present boom we are
experiencing.

Through better revenue collection, government was able to reduce tax rates
on both individuals and companies. It is worth reminding people that in 1994,
the company tax rate in South Africa was 40 percent, the secondary tax on
companies' rate was 15 percent and the top marginal tax rate for individuals
was 43 percent. In 1995, the secondary tax on companies' rate was raised to 25
percent. By 2005, all of these rates were substantially lower. Lower tax rates,
especially for individuals, are one of the reasons for higher consumption and
investment spending that we are seeing today.

Improved revenue collection and better control over spending led to a fall
in interest payments. However, this only started to happen about five years
after we began cutting the deficit. Falling interest costs has allowed
government to increase spending rapidly without raising taxes or borrowing
more. Since 2000, public spending has risen by over 70 percent in real terms.
In a short space of time, we have increased the number of social grant
beneficiaries from about 3 million to almost 11 million. We are now able to
spend billions more on infrastructure, and have in many cases surpassed the
targets we set for ourselves in 1994. Another factor contributing to the
present rate of economic growth is the rising infrastructure spends of
government, totalling R415 billion over the next three years.

Increased confidence in our economy means that we do not face a binding
constraint on the balance of payments. We are now comfortably able to finance a
much higher level of investment, providing the space for future growth. South
Africa received R144 billion in capital inflows last year.

Presently, the surge of growth in the economy is leading to some supply
constraints. This in itself can be a positive thing. It provides investors with
clear signals of where investment opportunities are to be found. The public
sector has a role to play in alleviating capacity constraints.

Areas where government is now focusing on include skills development and
investments in the built environment covering amongst other sectors housing,
public transport and water. For South Africa to sustainably grow faster, we
must improve our export performance, especially in non-commodity sectors.

The financial sector was one of the first sectors to adopt a collaborative
process to deal with the issue of our historically skewed ownership structure.
An innovation in South Africa at the time, the financial sector came together
with all major stakeholders and agreed to tackle empowerment issues in a
multidimensional approach. The Financial Sector Charter was signed committing
all participants to increase access to financial services, especially to the
poor, to broaden ownership to include historically disadvantaged individuals,
to invest in staff development, especially for black women and to invest in
transformational public projects in townships such as transport, housing and
retail developments. This charter is an example of how empowerment can be
interpreted in a way in which all parties win.

The banks came together to introduce what we call the Mzansi account,
targeted at low-income people and providing certain basic services at low cost.
To date we have over three million Mzansi account holders, notching up a major
success in broadening access to financial services to low income people.
Despite these successes, high banking charges are still an obstacle to even
faster growth in the retail-banking sector.

Economic policy has changed and evolved continuously since 1994, but the key
objective of reducing poverty and raising the living standards of the poor has
been a consistent one. Economic policy is about careful analysis to identify
problems and develop targeted responses to fix them. As a country, we have
shown that through partnerships, we can solve our problems. The financial
sector has been a solid partner in many of our endeavours.

The economy is performing well, but we still have millions living in poverty
and many more unable to get jobs. We cannot be satisfied with our performance
until we have made a bigger dent in unemployment and poverty. We are not yet
there, but we still have much to be proud of what we have achieved in such a
short space of time.

I hope you enjoy the rest of the conference and get a chance to sample the
warmth and hospitality that this city has to offer.

Thank you.

Issued by: National Treasury
5 June 2007