Bank, at the Namibian Stock Exchange Scholar Investment Challenge,
Windhoek
7 October 2006
Honoured guests,
Finalists of the schools competition,
Teachers of finalists of the competition,
Sponsors of the competition,
Ladies and gentlemen:
1. Introduction
It is with great pleasure that I present this address at your annual dinner.
The initiative of the Namibian Stock Exchange (NSX) to enhance awareness of its
activities in the countryside through the Scholar Investment Challenge is
indeed a commendable one. This competition raises awareness of financial
markets and investment in listed shares among the many participants drawn from
a broad cross-section of the Namibian population. I am sure we have amongst the
finalists in our midst today some of the stockbrokers of the future.
2. Common membership of regional initiatives
Namibia and South Africa share common membership of a number of regional
co-operation initiatives. Three of these that come to mind are the Southern
African Development Community (SADC), the Southern African Customs Union (SACU)
and the Common Monetary Area (CMA). Moreover, the Bank of Namibia and the South
African Reserve Bank (SARB) are active participants in the committee of Central
Bank Governors in SADC and the association of African Central Banks.
Of these regional co-operation initiatives, the CMA is the smallest in terms
of the number of member countries. However, it is the initiative with the most
direct bearing on monetary policy and financial market issues. The CMA
comprises South Africa, Namibia, Lesotho and Swaziland. Previously it existed
as an informal arrangement and included Botswana. In 1976 the arrangement was
formalised in a series of bilateral agreements. At this point Botswana chose
not to join the monetary area and Namibia joined after independence in
1990.
Although member countries have their own currencies, these currencies trade
at par and are pegged to the South African rand.
Member countries also apply broadly similar exchange control measures. This
currency arrangement has various implications for the CMA countries and their
central banks. I wish to mention three of these today.
First, the SARB leads the way in setting monetary policy for the CMA
countries. However we do take cognisance of the views of the partner banks in
periodic meetings of the CMA governors prior to the meetings of the Monetary
Policy Committee.
Secondly, South Africa has adopted inflation targeting as its nominal anchor
for monetary policy in February 2000. The target is to keep consumer price
indexing excluding interest rates on mortgage bonds (CPIX) inflation (that is,
headline inflation excluding mortgage interest costs) within a range of three
to six percent. This policy has served the interests not only of South Africa
but also of its CMA partners as is evidenced by the fact that the South African
rate of inflation used for targeting purposes has remained inside the target
range since September 2003. The CMA partner countries have also reaped similar
benefits, for example, the inflation rate in Namibia has declined from 9,3
percent in 2000 to 2,3 percent in 2005. I will say a bit more about South
Africa's monetary policy later on.
Lastly, the possibility of establishing a central bank for the CMA countries
is raised from time to time. A study was conducted in 2005 under the auspices
of the Committee of Central Bank Governors in SADDC (CCBG) outlining the costs
and benefits of the creation of a common central bank for the CMA countries.
However, decisions in this regard will be taken by the political leaders of the
CMA countries rather than by central bankers. This is probably a matter of
particular importance for our younger audience, as they might perhaps find
employment at this institution one day.
4. Exchange controls and related tax amnesty
In view of the high degree of regional co-operation discussed above, it is
necessary to make mention of the successful exchange controls and related tax
amnesty of South Africa. This amnesty was announced by the South African
Minister of Finance, Trevor Manuel, in February 2003.
The amnesty was announced against the background of an extensive system of
exchange controls that have been in place in South Africa for a considerable
period of time. Since democratic elections in South Africa in 1994,
considerable progress has been made with the gradual liberalisation of
controls. Measures included the abolition of the financial rand and the
introduction of liberal foreign investment allowances for South African
companies. This was particularly the case for investment in Africa. In
addition, the foreign investment allowances for South African individuals have
been increased over time to the current level of R2 million per individual.
The announcement of the amnesty was a next step in the gradual relaxation of
exchange controls. The amnesty had as its four goals the broadening of the
domestic tax base, provision of an opportunity to South Africans to regularise
their affairs without fear of prosecution, provision of updated information to
the SARB and the South African Revenue Service (SARS) and facilitation of
repatriation of foreign assets to South Africa without fear of
recrimination.
The amnesty succeeded beyond all expectations of the authorities.
More than 42 000 people applied for amnesty and more than 99 percent of
these applicants were granted amnesty. All four stated goals of the amnesty
were achieved.
First, amnesty applicants disclosed undeclared receipts and accruals
amounting to R1,36 billion which will increase the personal income tax base by
an estimated R400 million. Secondly, applicants who disclosed previously
unauthorised assets are shielded from prosecution. Moreover, the amnesty
legislation also relieved banks and financial advisors from reporting
responsibilities in terms of the South African Financial Intelligence Centre
Act, thus protecting the applicants.
In terms of the third objective, applicants disclosed around R68,9 billion
in foreign assets of which R45 billion constituted unauthorised foreign assets.
Fourthly, the amnesty process facilitated the repatriation of funds to South
Africa.
Applicants paid a total of R2,87 billion in amnesty levies in respect of
unauthorised foreign assets. These levies amount to some 0,7 percent of total
tax collections of the central government in the 2005/06 fiscal year and to
some 2,3 percent of personal income tax for the same period.
The successful completion of the amnesty in South Africa is a further step
in the direction of complete exchange control liberalisation.
The stated objective of the South African government is to proceed with a
gradual relaxation of controls. Relatively few controls remain so much so that
when full abolition is announced, it will most likely be a non-event.
5. The South African financial markets
Financial market developments in South Africa have significant implications
for financial markets in the region. I would, therefore, like to share with you
some key features of the South African financial markets. Starting with the
equity market, the Johannesburg Stock Exchange (JSE) is one of the oldest stock
exchanges in the world having been established as far back as 1886. In its 120
years of existence it has developed into the 17th biggest stock exchange in the
world, a remarkable achievement for an emerging market country like South
Africa.
Over recent years, there have been a number of important developments in the
JSE which contributed to its efficiency and global standing. Trading is fully
automated through an electronic clearing and settlement system, the Share
Transactions Totally Electronic (STRATE) system. The product base of the JSE
has also expanded to include not only shares but also a range of equity,
commodity and interest rate derivatives.
In 2002, the JSE entered into a strategic alliance with the London Stock
Exchange (LSE). This alliance led to a number of further improvements such as
the implementation of a new trading system and an indexing system that is
aligned to that of the JSE, as well as the adoption of listing requirements
that are in line with international best practice. These developments enhanced
the profile of the JSE in particular to international investors.
The latest development in the history of the JSE was its own demutualisation
in 2005. It became a public unlisted company on 1 July 2005 and listed on its
own exchange a year later.
At the end of 2005, the JSE had a market capitalisation of R3, 6 trillion,
with 388 companies listed on the exchange. Just over 60 of these companies are
listed on at least two other stock exchanges.
Some have up to seven listings including listings on the major exchanges of
the world. Turnover on the JSE has shown strong growth over recent years,
increasing from an annual turnover of R22 billion in 1992 to R1,279 billion in
2005.
Alongside the equity market, the South African bond market is also
formalised in the form of the Bond Exchange of South Africa (Besa) which was
established 10 years ago. As at 31 December 2005, Besa had granted a listing to
493 debt securities issued by 71 borrowers with a total nominal value of R637
billion equal to just over 40 percent of gross domestic product (GDP). All
bonds have been dematerialised and trading has been fully automated.
Government bonds comprise around 60 percent of the bonds listed on Besa,
with the rest consisting of bonds issued by parastatals and corporates.
Corporate bond issuances are currently increasing at a much faster rate than
government bond issuances. The annual turnover on Besa has increased from R2,1
trillion in 1995 to R8,1 trillion in 2005. The annual turnover is currently
about 38 times the market capitalisation, indicating good overall liquidity. In
the current year to date the turnover on Besa has already exceeded that of the
full year of 2005.
Developed domestic bond markets not only provide for an additional channel
for domestic savings mobilisation, they also provide valuable information to
the Monetary Policy Committee (MPC). Expected monetary policy developments are
reflected in bond yields and we in turn get a lot of information from the bond
market about market expectations concerning future monetary policy, inflation
and growth.
Non-residents are active participants in the South African capital markets,
accounting for around 20 percent of daily turnover on both the JSE and Besa. In
the year to the end of September, non-residents have bought a net R59 billion
worth of South African equities compared to R50 billion in 2005. Net purchases
of bonds have amounted to R20 billion, compared to net sales of R11 billion
last year.
In addition to improving the liquidity of our capital markets, these
purchases help to finance South Africa's current account deficit.
The participation of non-residents in the domestic financial markets is
facilitated by a liquid market for foreign exchange. The average daily turnover
against rand in the South African foreign exchange market is around US$10
billion and non-residents account for around 65 percent of these transactions.
However, one downside of such a liquid market is that it tends to make the rand
(and of course the Namibian dollar with it) much more volatile than the
currencies of other emerging-market currencies with less liquid foreign
exchange markets.
6. The NSX and the JSE limited
Compared to the JSE, the NSX is still young as it was established 14 years
ago in 1992. However, the establishment of an exchange represented an important
step forward for Namibia in the development of its capital market and in
providing an important avenue for domestic savings mobilisation.
The success of the NSX is illustrated by the fact that by 2005 it was the
second largest African stock exchange in terms of total market capitalisation
and the fifth largest in terms of traded value. Currently, 28 companies are
listed on the NSX, a high number of which have a dual listing on the JSE. The
NSX was also the first exchange in SADC to start using the JSE's electronic
trading system (the Jet system) in November 1998. Share trading on the NSX of
dual-listed South African companies is settled through STRATE. The existence of
dual-listings improves the liquidity and turnover on the NSX, making these
shares more attractive to investors. While benefiting from its close
relationship with the JSE, the NSX retains control over its own listing
requirements, regulations and supervision over compliance and can adapt these
according to the requirements of the domestic economy.
The NSX and the JSE are both founder members of the Committee of SADC Stock
Exchanges (COSSE). The Committee of SADC Ministers for Finance and Investment
agreed to recognise COSSE as a private sector association at their meeting held
on 18 July 1997 in South Africa. In terms of the aims of COSSE, the NSX and the
JSE play an important role in the institutional structures of stock exchanges
in SADC. Among others, COSSE has set itself the challenging goal of
establishing by 2008 an integrated real time network of the national securities
markets within SADC thus facilitating progress with the process of financial
integration within the SADC region. This will pave the way towards cross-border
listings and therefore trading and investments among the different Member
Exchanges of SADC.
However, like all successful developments in market infrastructure, this
should also be driven by market participants who will seek the optimum balance
between cost and risk.
7. Recent monetary policy developments in South Africa
As I indicated earlier the existence of the CMA implies that South Africa
effectively determines monetary policy for the whole CMA.
CPIX inflation has been within the inflation target range since September
2003 and averaged 4,3 percent and 3,9 percent in 2004 and 2005 respectively.
Since March of this year, CPIX inflation has been steadily rising mainly as a
result of rising energy and food prices and in August inflation increased at a
year-on-year rate of five percent.
Buoyant consumer demand, which increased at an annualised rate of eight
percent in the second quarter of this year, has been posing a further risk to
the inflation outlook. This demand has been fuelled by credit extension growth
in excess of 25 percent. These developments contributed to the expanding
current account deficit which measured in excess of six cent of GDP in each of
the first two quarters of this year.
This is turn has contributed to the recent weakness in the rand which has
depreciated on a trade weighted basis by approximately 23 percent since early
May. This degree of depreciation, in turn, poses a further risk to the
inflation outlook.
In response to these developments, the Monetary Policy Committee of the
South African Reserve Bank has raised the repo rate by 50 basis points at each
of the past two meetings of the Monetary Policy Committee. This change in the
monetary policy stance has occurred against the backdrop of a strongly growing
domestic economy. South Africa's economic growth averaged 4,5 percent and 4,9
percent in 2004 and 2005 respectively. Despite the change in the monetary
policy stance, we do not anticipate that growth prospects will be significantly
undermined. Our focus, however, remains on the inflation target and we will
continue to strive to maintain CPIX inflation within the three to six percent
target range.
6. Conclusion
The NSX Scholar Investment Challenge is similar to the competition
introduced 34 years ago by the JSE for South Africa schools. The competition is
a major success in South Africa and it seems to me that the same can be said
about the Namibian competition. This competition teaches participants the
fundamentals of investment strategies and financial markets and encourages them
to develop an interest in the trading of shares on the NSX. I trust that
participation in this competition has introduced new possible career choices to
the participants.
The teachers accompanying the participants also deserve special recognition.
Your care and commitment has laid an important foundation in the lives of the
finalists. Likewise the sponsors of the competition have made it possible for
the finalists to be here today and they have also assisted in broadening the
intellectual horizon of the participants in the competition. We trust that the
knowledge gained about financial markets will spur many of them to greater
heights in the corporate world in the future.
Naturally, only one team can win this competition, but I must stress that
all participants attending tonight should really be regarded as winners. To
make it to one of the top five positions in this competition is a major
accomplishment. My best wishes accompany all of you in your careers ahead of
you, as you have already shown your dedication to the achievement of your
goals.
Thank you!
Issued by: South African Reserve Bank
7 October 2006
Source: South African Reserve Bank (http://www.reservebank.co.za/)
