general meeting of shareholders
23 August 2006
We live in an ever-changing global environment, an environment that is
characterised by opportunities and hope, but also fraught with risks. In this
environment the South African Reserve Bank (SARB) must implement its mandate
and manage the associated risks to ensure that South Africans benefit from
opportunities emanating from a changing world.
Today, I am pleased to report on another successful year in the
eighty-five-year history of the SARB.
The achievement and maintenance of price stability remains the primary
objective of the SARB. Indeed, the most significant accomplishment of the SARB
has been the containment of inflation within the target range since September
2003. This does not imply that the other functions of the SARB are neglected.
On the contrary, these remain crucial in the operations of the SARB.
Today, we also release our Annual Economic Report which covers the broader
aspects of the domestic and international economy that impact on many of the
activities of the SARB. This address will highlight, where relevant, some of
the salient economic developments which have affected our operations. The focus
of this address is on the main operational areas of the SARB including monetary
policy, monetary operational procedures, gold and foreign exchange reserve
management, the national payment system, banking regulation and supervision,
international co-operation and internal administration.
Monetary policy
Monetary policy during the past year was conducted against the background of
a strongly growing international economy and buoyant commodity prices. This
strong growth, combined with rising geopolitical tensions and other supply
constraints, placed upward pressure on international oil prices, which reached
highs of almost US$80 per barrel in recent weeks. Despite the high oil prices,
world inflation initially remained subdued, but inflationary pressures have
since begun to emerge in a number of countries. This has prompted the
tightening of monetary policy by several central banks in the past few
months.
Domestically, the economy grew by 4,9 percent in 2005. In the first two
quarters of 2006, economic growth remained robust but showed some moderation
compared to 2005. An annualised growth rate of 4,2 percent was recorded in the
first quarter of 2006.
Inflation remained under control in the period under review, with changes in
CPIX (that is the consumer price index for metropolitan and other urban areas
excluding mortgage interest cost) remaining within the target range of three to
six percent. In the twelve months from 1 April 2005 to 31 March 2006, the
year-on-year customer inflation excluding mortgage rates (CPIX) inflation rate
averaged 4,1 percent, but changes ranged between 3,5 and 4,8 percent over the
period. From March to June 2006, CPIX inflation accelerated from 3,8 percent to
4,8 percent.
Services price inflation continued to decline and had fallen below goods
price inflation by the beginning of 2006. This was partly a reflection of the
continued containment of increases in administered prices, other than petrol
prices. The higher trend in goods prices was initially mainly due to petrol
price increases, and more recently food price increases. During the first nine
months of 2005, food price inflation averaged 1,8 percent and therefore
contributed to the downward trend in inflation. Following the strong increase
in maize prices towards the end of 2005, food price inflation began to increase
and had risen to 7,2 percent by June 2006. By contrast, the prices of a number
of categories of goods fell, particularly clothing and footwear, and
furniture.
Production price inflation increased over the past year and averaged around
5,5 percent in the first four months of 2006, compared to 2,3 percent in June
2005. However, a further acceleration occurred in May and June 2006, when
producer inflation reached levels of 5,9 percent and 7,5 percent, respectively.
Changes in energy and food prices provided much of the impetus to higher
production prices.
For much of the reporting period the inflation outlook was fairly stable and
favourable. This allowed for an unchanged repo rate of seven percent for a
prolonged period following the reduction by 50 basis points in April 2005. In
the past year, there were a number of developments that supported a favourable
inflation outcome. Lower inflation expectations appeared to have had an impact
on wage settlements which have declined steadily. Unit labour cost increases
were also moderate, with an average rate of increase of 3,4 percent for 2005,
significantly down from the rate of 6,5 percent recorded in 2004.
These developments, combined with the increased credibility of monetary
policy as indicated by improved inflation expectations, were expected to
support sustainable low inflation.
The inflation outlook was also supported by continued fiscal discipline,
output growth in line with growth potential and low world inflation. The
initial impact of the significant increase in international oil prices on world
inflation, world growth and domestic inflation was minimal, confounding earlier
fears of a repetition of inflation spirals seen during previous oil price
shocks.
Some of the other determinants of inflation have remained favourable for
much of the period, although their associated risk increased over the past
year. The exchange rate remained within a fairly stable trading range over much
of the period. However, following increased uncertainties in the international
markets from May 2006, the rand came under pressure, along with the currencies
of a number of other emerging-market economies. The rand exchange rate also
reacted further to the publication in June of the first quarter current-account
deficit of South Africa. Between the beginning of May 2006 and the beginning of
August, the trade-weighted exchange rate of the rand depreciated by
approximately 14 percent.
Despite the positive developments in the inflation outcomes during the past
year, there was a steady deterioration in the outlook of a number of the
fundamental determinants of inflation, increasing the degree of upside risk to
the inflation outlook. Of increased concern to the Monetary Policy Committee
(MPC) was the continued strength of domestic demand. For the past two years,
household consumption expenditure has grown at annual real rates of almost
seven percent. Retail sales continued to grow strongly and consumer confidence
reached an all-time high by the end of 2005. This was fuelled by high rates of
credit extension which averaged over 20 percent during the past year, and
resulted in household debt rising to 66 percent of disposable income in the
first quarter of this year.
The strong growth in expenditure had little immediate impact on domestic
inflation, although the MPC noted at its meeting in February 2006 that adverse
price effects would be inevitable if these trends continued unabated. Increases
in consumption expenditure, however, contributed to the progressive widening of
the deficit on the current account of the balance of payments from 4,2 percent
of gross domestic product in 2005 to 6,4 percent in the first quarter of 2006.
This development was seen by the MPC to pose a potential threat to inflation
through its possible impact on the exchange rate, should the deficit be
regarded as unsustainable. Nevertheless, these deficits were adequately
financed by capital inflows.
The sustained strong domestic demand, combined with threats posed by
international oil prices, food prices, and exchange rate developments,
increased the risk to the inflation outlook. In response to these heightened
risks and the deteriorating inflation outlook, the MPC felt that pre-emptive
action was required. Accordingly, the repo rate was increased by 50 basis
points to 7,5 percent on 8 June 2006 and by a further 50 basis points on 3
August 2006. However, future monetary policy decisions will depend on changes
in the outlook for inflation and economic developments.
Monetary operations
The SARB uses open-market operations to provide and drain liquidity from the
money market in order to maintain the liquidity requirement of banks at a level
sufficient for the implementation of monetary policy in line with the stance
determined by the MPC. Deposits of banks at the SARB in terms of the minimum
statutory cash reserve requirement (2,5 percent of liabilities, as adjusted)
amounted to R28,7 billion for the June/July maintenance period. As at the end
of June 2006, total outstanding debentures on issue by the SARB and longer-term
reverse repurchase transactions amounted to R5,4 billion and R2,0 billion,
respectively.
The deposits of the Corporation for Public Deposits with the SARB, which
amounted to R11,1 billion at the same date, also contributed to the draining of
excess liquidity. Notes and coin in circulation also had a contractionary
impact on liquidity, increasing from R49,0 billion on 30 June 2005 to R53,9
billion a year later.
Currency in circulation
The daily average value of banknotes in circulation in the period 1 April
2005 to 31 March 2006 amounted to R46,3 billion, while the average value of
coin in circulation during the same period amounted to approximately R2,7
billion. While banknotes in circulation increased by 10,2 percent over the
previous corresponding period, coin in circulation increased by 9,1 percent. A
seasonal peak for banknotes and coin in circulation of R57,4 billion was
reached on 23 December 2005.
The demand for coin has shown a substantial increase in the past few months.
This is particularly the case in respect of the demand for the 5c coin, which
shows an increase of approximately 30 percent, compared to the corresponding
previous reporting period.
The SARB has co-operated with commercial banks in the development of a more
efficient and effective integrated national cash management system. The
improved system has the potential to limit the cash holdings of banks, thereby
contributing to a reduction in the cost of cash to the public.
Gold and foreign exchange reserves
The activities of the SARB in the domestic foreign exchange market are aimed
at managing domestic money-market liquidity conditions through foreign exchange
swaps, servicing the foreign exchange requirements of clients and increasing
foreign exchange reserves in a prudent manner when conditions permit. The SARB
does not aim to influence the exchange rate of the rand, but leaves its
determination to the forces of demand and supply in the foreign exchange
market.
The SARB continued to take advantage of favourable market conditions to
increase the level of official gold and foreign exchange reserves. Gross
reserves increased from US$15,9 billion at the end of March 2005 to US$23,95
billion at the end of June 2006.
Over the same period the international liquidity position increased by
US$7,79 billion to US$20,19 billion. The increase in the level of official
reserves has been well received by market participants and rating agencies and
has contributed to the improved perception of South Africaâs fundamentals by
international investors.
The SARB and the National Treasury co-operate very closely in the process of
accumulating reserves. In making rand-denominated deposits with the SARB,
the
National Treasury assists with absorbing the excess liquidity created by the
purchases of foreign exchange. As at the end of June 2006, government deposits
at the SARB, the greater part of which related to this sterilisation
initiative, amounted to R36,2 billion.
The higher level of foreign exchange reserves resulted in an increased focus
on the management thereof to ensure safety, liquidity and an adequate return
within conservative risk parameters. At the end of June 2006, the internally
managed portfolios comprised 81 percent of gross reserves, with the balance
managed externally. Internal reserve management capacity and skills have been
strengthened significantly through training and skills transfer agreements with
external fund managers.
Securities lending programme was implemented in July 2005. In terms of this
programme, securities held on behalf of the SARB by a custodian can be used in
lending transactions against cash or other high-quality collateral. The income
and fees generated by this programme help to defray some of the costs incurred
as a result of the external fund management programme.
In April 2005, the National Treasury made a final payment in the form of
zero-coupon bonds to the SARB as compensation for losses accumulated over many
years in the Gold and Foreign Exchange Contingency Reserve Account.
Financial stability
As you are aware, the SARB is not the sole custodian of financial system
stability, but contributes towards a larger effort involving the government,
other regulators and self-regulatory agencies, and financial market
participants.
The activities of the SARB relating to financial stability include the
application of policies, instruments, norms and tools to prevent, detect and
manage systemic instability of institutions, markets, and the payment and
settlement system. The robustness of the financial regulatory system was
continually assessed and reported on in the bi-annual Financial Stability
Review of the SARB. Confidence in the domestic financial services sector
remains high.
National payment system
The SARB published its new strategic framework and strategy for the National
Payment System (NPS), known as Vision 2010, in April 2006. Vision 2010 provides
strategic direction for the payment system and its bank and non-bank
participants up to 2010, identifying five major challenges for the payment
system. These challenges include accessibility; transparency; security; support
for payment, clearing and settlement initiatives of the Southern African
Development Community (SADC); and keeping abreast of international
developments.
The monthly value of settlement in the South African Multiple Option
Settlement (SAMOS) system amounted to R4,6 trillion in June 2006, or
approximately R200 billion per day. This includes the settlement of
transactions stemming from the equity and bond markets, as well as the rand leg
of domestic foreign exchange transactions. Approximately 90 percent of
settlement through SAMOS is affected on a real-time basis during the day, while
the remaining 10 percent, which emanates from the retail batch environment, is
settled in the evening. An upgrade of the SAMOS system, providing for the
handling of dematerialised money-market instruments, was successfully
implemented in June 2006.
The SARB continued to facilitate a low-cost payment solution between the
different role players in the low-income collection environment. The first
directive for conduct in the payment system for banks participating in the
low-income collection environment was issued by the SARB during the period
under review.
Banking regulation and supervision
The South African banking regulatory framework has to be amended to provide
for the requirements of the new international Capital Accord (Basel II) for
banks. During the period under review, two drafts of amendments to the Banks
Act, No 94 of 1990, and the regulations thereto, were circulated for comment to
the Accord Implementation Forum (AIF), comprising representatives of the SARB,
the National Treasury, the banking sector and The South Africa Institute of
Chartered Accountants.
All registered banks, branches of foreign banks and mutual banks in South
Africa were requested to perform a gap analysis and self assessment, including
an impact study of prescriptions for their capital-adequacy requirements, to
determine their readiness for the implementation of Basel II. In order to
capture the risks faced by an entire banking group, Basel II will be applied on
a consolidated basis to internationally active banks.
The SARB participated in a joint project with the National Treasury to
investigate the requirements necessary to implement a deposit-insurance scheme
for South Africa. Once certain issues have been resolved, a final proposal will
be submitted to the Minister of Finance for consideration.
A corporate governance review of 14 South African banks (including two
mutual banks, but excluding the five biggest banks) was undertaken during the
period under review. Its purpose was to assess the compliance of the banks
under review with sound corporate governance practices as laid down in the
Banks Act or the Mutual Banks Act, No 124 of 1993, the regulations to these
acts, the recommendations of the Myburgh Report on the Standard of Corporate
Governance in the Five Largest Banks, and the second King Committee on
Corporate Governance.
International co-operation
The SARB continued to play an active role in the international arena. The
SARB and the National Treasury will jointly chair the Group of 20 (G-20) in
2007 and the SARB has been very active in preparing for this. The SARB has
established a G-20 Unit for this purpose, which works closely with the G-20
Secretariat in the National Treasury. Established in 1999, the G-20 is a forum
where central bank governors and ministers of finance of developed and
systemically important emerging and developing economies deliberate on issues
related to global economic and financial stability in support of global growth
and development. The SARB and the National Treasury will undertake the
preparations necessary for hosting meetings and seminars of the G-20 next year.
In August 2005, a G-20 seminar on economic growth was held at the SARB, jointly
hosted by the South African Reserve Bank, the Bank of Mexico and the Peopleâs
Bank of China.
The SARB is an active member of the Bank for International Settlements (BIS)
which acts as the central bank for the central banks of member countries. In
May 2005 the SARB bought further shares in the BIS which represented a pro rata
allocation of the redistribution of a portion of United States (US) shares in
the organisation. I regularly attend the meetings of the BIS, until recently
representing the only African country. I am pleased to say that after many
years of persuasion by us for the admission of another African country, Algeria
is now a shareholder of the BIS.
Our co-operation with the International Monetary Fund (IMF) continues. In
May 2006, I was appointed by the Managing Director of the IMF, Mr Rodrigo de
Rato, as a member of the Committee of Eminent Persons to study the long-term
sustainability of the finances of the IMF. There is little doubt that
international organisations such as the IMF should become more accountable to
their membership regarding their operations.
It is my strong view that the financing of any organisation has an important
bearing on its accountability and transparency. It is envisaged that the
Committee will meet four or five times over the next six months, and will table
its report in early 2007.
The SARB continues to improve its international co-operation efforts with
global partners. During this year the SARB has signed Memoranda of
Understanding (MoUs) with the central banks of Argentina and Ukraine.
Discussions on co-operation agreements have advanced significantly with the
central banks of China and Peru, and completion and signing off of such
agreements are expected in due course.
With regard to regional integration activities on the continent, the SARB
continues to host the Secretariat of the Committee of Central Bank Governors
(CCBG) in Southern African Development Community (SADC). Good relationships
with central banks in the region have been boosted this year as three MoUs in
the areas of information technology, exchange control and payment systems have
been signed by central bank governors.
The SARB participated in the annual regional payment conference for
countries in SADC, which focused on general payment system developments. In
addition, three payment-system workshops were hosted for SADC countries during
the period under review. The aim of these workshops was to evaluate the payment
system of each SADC country in accordance with the Financial Sector Assessment
Programme of the IMF and the World Bank. These evaluations and the report to
the IMF and the World Bank will form the basis of the annual regional payment
conference to be held later this year.
The South African Reserve Bank College continued to play a key role in
training staff members of central banks and financial institutions in Africa.
It also co-organised the IMF Financial Programming and Policies course and a
Financial Markets Analysis course presented by the Joint Africa Institute.
Internal administration
The Annual Report of the SARB was distributed to shareholders before this
meeting. The balance sheet totals of the SARB show an increase from R129
billion at the end of March 2005 to R168 billion at the end of March 2006. The
increase was mainly the result of the accumulation of official gold and foreign
exchange reserves and was financed in the main by an increase in government
deposits. The profit before taxation of the Bank increased from R866 million
for the previous financial year to R1 038 million for the financial year ending
31 March 2006.
Budgeted expenditure of the SARB for the current financial year amounts to
R1 615 million, compared to actual expenditure of R1 530 million in the
financial year to 31 March 2006.
This represents an increase of 5,56 percent in budgeted expenditure compared
to actual expenditure for the previous financial year. The four subsidiary
companies of the SARB achieved their objectives during the financial year.
After a review of reports by their Boards of Directors, and internal and
external auditors, the SARB is satisfied that these companies are managed in
accordance with their objectives and best corporate governance practice. The
results of the subsidiaries are reported on a consolidated basis with those of
the SARB in the financial statements.
During the financial year to 31 March 2006, 40 transactions in respect of
123 808 shares of the SARB were concluded. On 31 March 2006, the SARB had 615
shareholders and by the end of June this number had remained unchanged.
Improved operational efficiency has been achieved since the introduction of
a revised organisational structure of the SARB in August 2005. As was
envisaged, this structure allows the governor and deputy governors to devote
more time to policy and strategic planning, while the executive general
managers are responsible for the general management, supervision and control of
the Bank departments reporting to them.
The SARB has embarked on a number of capital projects. The existing
infrastructure of the head office building is currently under improvement to
ensure maintenance and optimal utilisation. The SARB has also made considerable
progress with the practical implementation of its business continuity
management and disaster recovery strategies.
A dedicated disaster recovery site for head office operations has been
completed and will be fully functional towards the last quarter of 2006.
Business continuity planning for the seven branch offices and the subsidiaries
has also been completed.
In the year under review the total staff complement of the SARB declined
further to 1 956 as at the end of March 2006 and 1 937 at the end of June 2006.
This can be compared to a staff complement of 2 288 in March 2003. Staff
turnover in the Bank has increased from 4,3 percent in the 2002/03 financial
year to 7,1 percent in the financial year ending 31 March 2006. These trends
could eventually impact on the employment equity targets of the SARB, as many
of the resignations occurred from the designated groups at middle management
level.
The SARB contracted an external party to conduct an organisational culture
and climate survey during February and March 2006. The study achieved a high
level of voluntary participation among staff members. Although the study has
identified a number of areas where the SARB should focus initiatives to improve
staff morale, it has also indicated that staff members are satisfied with many
other aspects relating to the Bank as an employer.
The SARB has also engaged an external service provider to conduct voluntary
HIV/AIDS prevalence testing among its staff, after launching its HIV/AIDS
Response Programme in February 2006. Preparation is currently taking place for
the roll-out of the initiatives of this programme on a SARB-wide basis,
covering matters such as HIV/AIDS awareness and education campaigns, and the
training of management and employees in HIV/AIDS counselling.
The SARB is viewed as an industry leader in complying with the requirements
of the Employment Equity Act, No 55 of 1998 (EE Act), and the Skills
Development Act, No 97 of 1998. The mandates of the structures created for
consulting in terms of the EE Act have been amended during the period under
review to encompass consultation on the workplace skills plan before its annual
submission to the Bankseta.
The SARB has made significant improvements in employment equity in recent
years. The employment equity representation at the end of June 2006 was 56
percent black and 46 percent female in total. At management level the figures
were 43 percent black and 36 percent female, respectively. However, we have not
entirely achieved the target of 50 percent black at all levels of seniority as
was envisaged in the original Employment Equity Plan submitted six years
ago.
A draft second employment equity plan has been completed and is currently
the subject of consultation with staff. The draft plan, to be submitted to the
Department of Labour in October 2006, proposes an increase in the target for
female employment from 33 percent to 50 percent of the staff complement at all
levels of employment. A target of two percent of employment for people with
disabilities is also under consideration.
A number of training and development interventions were conducted during the
2005/06 financial year. A total of 1 346 employees benefited from these
interventions; including 626 staff members who attended courses at the South
African Reserve Bank College. In addition, 230 staff members received study aid
during the year to 31 March 2006 to improve their formal qualifications.
The SARB has concluded an extensive consultation process with staff, the
Employment Equity Consultative Body and the finance union SASBO regarding the
modernisation of staff-related policies. In this process the original policies
proposed by the Bank have been amended to incorporate many of the views
expressed by these stakeholders. A process has been embarked upon to
familiarise staff with the new policies and it is anticipated that
implementation will take place on 1 October 2006.
Conclusion
Reflecting on another successful year in the long history of the SARB, the
preceding review provides ample evidence of the achievement of the various
objectives of the SARB. Monetary policy has contributed to the containment of
CPIX inflation to within the target range against the background of various
risks to the inflation outlook. The MPC will remain vigilant and will not
hesitate to adjust the monetary policy stance when necessary. The SARB is
committed to the pursuit of low and stable inflation as a major contributing
factor to the growth and development of South Africa.
The SARB will carefully monitor the progress of South African banks towards
ensuring their readiness for the implementation of Basel II on 1 January
2008.
As always, the internal management of the SARB will receive the necessary
attention. The SARB values its human resources very highly and this is borne
out in the new and modernised staff-related policies that will be implemented
later this year. The SARB is committed to the training and development of staff
which will be done in pursuit of transformation as envisaged in the new
employment equity plan. We will continually strive towards creating an
organisational culture that makes the Bank an employer of choice.
Acknowledgements
I want to thank the Presidency, the Government and Parliament for their
continued support. The Minister and Deputy Minister of Finance, and the
Director General of the National Treasury and his staff also supported the SARB
in the conduct of its business.
I want to express a hearty word of thanks to the Board members for their
commitment and service to the SARB. It is an honour and privilege to work with
such a diverse and distinguished group of people. During this year, Ms A M
Mokgabudi stepped down from the Board and as Chairperson of the Remuneration
Committee because of professional commitments. Her service to the SARB is
greatly appreciated.
Although I have paid tribute to Mr I Plenderleith at the previous general
meeting, he officially retired as Deputy Governor in January 2006. It is
accordingly appropriate to thank him again on this occasion for his dedication
and service to the SARB. Finally, the SARB cannot achieve its goals without the
loyalty, service and dedication of its management and staff. I wish to thank
the deputy governors, management and staff of the SARB for their
contributions.
Issued by: South African Reserve Bank
23 August 2006
Source: South African Reserve Bank (http://www.resbank.co.za)
