T Mboweni: Regional Business Achievers Awards Dinner of Businesswomen's
Association

27 June 2007

Honoured guests
Ladies and gentlemen

1. Introduction

Thank you for your invitation to speak at this business achievers awards
ceremony. For too long the world of business has been a domain for men only,
but in recent years more and more women have been making their mark in this
arena. The Businesswomen's Association has been instrumental in promoting and
encouraging women who have entered the business world. The important role that
women played in the liberation of our country is without question. Women have
also played an important role in various fields which have contributed to the
overall development of the country. It is now time for women to be at forefront
of the business sector. Women in business are a scarce resource and your
efforts deserve support.

The economic environment in South Africa has been extremely positive in
recent times, with growth averaging around five percent for the past three
years. An important contributing factor to this favourable environment has been
the behaviour of commodity prices. As a commodity producer, we should be
pleased when commodity prices are performing well.

However, as we know from past experience, commodity price booms can be a
mixed blessing. Too often in our history we have ignored the fact that
commodity prices move in cycles. There had been a tendency to regard price
booms as being permanent, only for things to end in tears when the cycle ended.
The current boom has persisted for longer than many had predicted, leading to
suggestions that we are now in a commodity super-cycle. At the same time,
commodities have become a new asset class on their own. In my comments this
evening I will highlight some of the recent developments in commodity prices
and some of the challenges posed for the economy in general and monetary policy
in particular.

2. Commodities and the South African economy

As you are aware, commodities have played a central role in South Africa's
economic development. The mining industry, largely supported by gold, diamonds,
coal and the platinum group of metals, has for more than a century contributed
significantly to the national economy. It has provided the impetus for the
development of physical infrastructure, as well as the establishment of the
country's secondary industries.

South Africa is a leading supplier of a range of minerals and mineral
products. According to the Chamber of Mines, in 2005, approximately 55
different minerals were produced from 1 113 mines and quarries, of which 45
mines produced gold, 29 produced platinum-group minerals, 64 produced coal and
202 produced diamonds. Mining, therefore, remains a key foundation of the South
African economy. In 2005 mining made a direct and indirect contribution of
approximately 15 percent to Gross Domestic Product (GDP), accounted for around
50 percent of merchandise exports (including primary and beneficiated mineral
exports), 12 percent of fixed investment, 30 percent of the market value of the
Johannesburg Securities Exchange (JSE) limited and 20 percent of formal-sector
employment.

However, it is important to note that an abundance of resources has not
always implied a prosperous economy. This is particularly true for many
resource-rich African countries, which until recently have not benefited from
their resource endowments. Natural resources are also not a prerequisite for
growth. Countries such as Japan and Switzerland with few natural resources have
at times outperformed countries with a wealth of resource endowments. In fact,
having natural resources is sometimes regarded as a curse. As far back as the
1950s, Prebisch and Singer postulated the secular decline of terms of trade of
commodity-producing countries. The essence of their argument was that commodity
prices had a tendency to decline over the long term. This, until recently, has
been largely borne out by empirical evidence.

In the last 140 years there have been 18 commodity cycles, with slumps being
more persistent than booms. In some instances in sub-Saharan Africa, commodity
price slumps have lasted over 30 years. However, since 2001, as commodity
prices have boomed, we have witnessed impressive economic growth in many of the
resource-rich African countries. Notwithstanding the structural shift from a
commodity-based country to a more services-oriented one, South Africa has also
experienced a concomitant increase in growth over this period.

3. Commodity price movements over the last five years

During 2001, the overall commodity index as measured by the International
Monetary Fund (IMF) to increase steadily. This increase has continued well into
2007, particularly in the case of energy and metals. Not only have the
increases been more persistent, giving rise to the super-cycle hypothesis, but
the surge has been larger than in previous cycles. Increases have also differed
significantly across commodities. For example the price of North Sea Brent
crude oil increased from around $19 per barrel in 2002 to around $72 per barrel
in June 2007, having peaked at almost US$80 per barrel in August last year.
Metals have also shown a strong increase with gold and platinum prices having
increased by approximately 120 percent over the same period.

Agricultural prices, by contrast, have displayed more volatility and less
growth when compared to energy and metals. Between 2001 and 2006, the IMF
commodity food price index increased by 36 percent. More narrowly and perhaps
more relevant to South Africa, the cereals price index increased by 48 percent
over the same period. In 2006 alone, the IMF maize and wheat price indices
increased by 24 per cent and 26 percent respectively.

Food price inflation is becoming a worldwide concern and South Africa has
not been spared. Spot prices of yellow and white maize have increased from
levels of around R500 per ton in 2004 to current levels of around R1 800 per
ton driven in part by international price developments. In October and November
last year, meat prices increased at year-on-year rates of almost 20 percent and
currently overall food inflation is in excess of 8 percent per annum.

4. What has driven the recent price increases?

It used to be the case that the growth cycle in the United States determined
the commodity cycle. More recently, with the emergence of the Asian economies
and China in particular, the dominant influence of the US economy on the
commodity cycle has waned. Most commentators attribute the recent escalation of
commodity prices to the increase in demand for raw materials by China in the
wake of this country�s ongoing economic growth and industrialisation.

Two factors are frequently mentioned as part of the explanation of China's
impact on global commodity prices. Firstly, China's large population of over
1,3 billion and the associated large pool of unskilled labour have contributed
to increased competitiveness and has led to China being the leading
manufacturing production centre of the world. This has in turn kept the demand
for commodity inputs in manufacturing high. Secondly, China's industrialisation
comes at a time of ongoing globalisation, which has contributed to overall
demand for commodities globally.

China's contribution to global growth in the consumption of base metals in
recent years has been considerable. According to the IMF World Economic
Outlook, between 2002 and 2005, China's contribution to world consumption
growth in aluminium, copper and steel was around 50 percent. Furthermore, China
contributed in excess of 80 percent to increased world demand for nickel and
tin.

More significantly, over the same period, China accounted for all the
consumption growth in lead and zinc, and for 30 percent of world consumption
growth in oil. Due to its rapid growth and rising share in the world economy,
China is expected to retain its critical role in driving commodity price
movements.

The recent increase in food prices has been the result of a number of
factors including a weaker US dollar, the impact of higher energy and
fertiliser prices, crop-specific supply shortfalls and droughts, and low
inventory levels. Some analysts suggest that higher global real incomes have
also contributed to the upward pressure on food prices. An increasingly
important driver of agricultural prices comes from the strong demand for
bio-fuels, which has seen the diversion of agricultural output to energy
production. Although a number of countries have made significant strides in
bio-fuels production, the United States (US) and Brazil together account for
more than 70 percent of worldwide production of ethanol.

5. The commodity price boom and the markets

In recent years, investor interest in commodities has increased in line with
the rise in commodity prices and increased global liquidity. Trade in commodity
indices, which total approximately US$100 billion has increased by a factor of
20 in the past decade. This is still relatively small compared to other asset
classes but there has been a proliferation and diversification of the investor
base including hedge funds and asset managers who have seen commodities as a
means to diversify portfolio risk and take advantage of the high yields that
have been achieved. Significantly, investors are increasingly viewing
commodities as a long-term investment.

The financialisation of commodities has also been boosted by developments in
financial engineering, with strong growth underlying contracts and investment
strategies. Expectations of continued and sustained growth in Asia,
particularly in India and China, have served to fuel the increased demand for
commodity asset classes. A deeper and diversified market can bring benefits in
terms of market efficiency. For example the fact that it is easier to hedge
future production reduces the risk of new productive investment which may
otherwise take some time to come on stream.

A related issue concerns the role of speculators who are regarded by some as
being responsible for price volatility in the market. Recent evidence, however,
suggests that this may not necessarily be the case. A recent study conducted by
the Chicago Futures Trading Commission showed that speculative traders were not
leading but rather responding to market developments. This suggests that
speculators have tended rather to stabilise the market.

Developments in the financialisation of commodity markets may, however,
raise several financial stability questions for central banks and financial
sector regulators. In particular, it is not certain whether regulators have
enough information about the exposures of financial institutions to the prices
of their export commodity or about how firms' foreign exchange exposure could
compound their commodity exposures.

Moreover, a rise in commodity price volatility could make domestic financial
assets more volatile. An additional challenge for central banks stems from the
credit exposure to the primary production sectors of the banking system and
pension funds which have significantly increased their exposure to commodity
assets. Furthermore, central banks should always be alert to sudden declines in
commodity prices that may bring about deflationary pressures and financial
instability in the domestic economy.

6. Economic policy challenges

Despite the positive impacts of higher commodity prices on the economy, they
also create various problems and challenges for economic management. For
commodity-exporting countries, commodity price booms bring with them the
concern about the possibility of Dutch disease, which arises when a booming
primary sector causes the real exchange rate to appreciate and this in turn
puts pressure on the manufacturing and other tradable sectors of the economy.
The concern is even greater when the cycle turns and the loss of markets by the
manufacturing sector is not easily reversible.

From a fiscal policy perspective, the challenge that arises relates to the
management of windfall revenues. To the extent that tax revenues are boosted by
the commodity boom, there may be a need to smooth expenditure and not treat the
revenue increase as permanent. A number of primary-commodity exporters, for
example Chile and Norway, have created national wealth funds to ensure that
expenditure can be maintained when the commodity cycle declines and tax
revenues fall.

Monetary policy would be concerned with the possible impact of commodity
price increases on inflation. Ironically, the strong non-oil commodity price
increases have not translated into generalised inflation. In fact the commodity
boom has coincided with a long period of low global inflation. Part of the
reason may lie again with China and globalisation. High rates of productivity
growth in China have allowed for the production of a wide range of goods at low
prices despite the increased costs of inputs. In a highly competitive
globalised world market and credible monetary policies, product price increases
have remained low or prices have even fallen in some instances.

Oil and food prices, however, appear to be posing more of a threat to the
global inflation outlook than other commodities. Nevertheless, contrary to
initial fears, the impact of rising oil prices has had less of an impact on
inflation and output than in previous episodes of oil price increases. This may
be because of a general decline in oil intensity in many countries and more
credible monetary policy frameworks. However, oil and food prices have been the
driving forces of recent inflation developments in South Africa and pose the
major upside risks to inflation both here and abroad.

Monetary responses to terms-of-trade shocks such as oil price increases are
not straightforward and depend in part on the magnitude and duration of these
shocks. In essence, the issue boils down to distinguishing between permanent
and transitory changes in these prices, and how the first- and second-round
effects are likely to influence future inflation outcomes. In general, central
banks are not likely to change monetary policy in response to commodity price
fluctuations. Monetary policy should address the risks emanating from possible
second-round effects, i.e. adjustments in expectations triggered by movements
in commodity prices which may exert an impact on the inflation process.

7. Conclusion

Not surprisingly, in our uncertain world, there are conflicting views on the
outlook for commodity prices. Some believe that commodity prices will fall back
to their long-term declining trend. Others however, foresee a sustained boom,
or at worst a levelling off at higher levels, given the ongoing
industrialisation in China and other emerging-market countries.

Whatever the future course of commodity prices, there is little doubt that
it will have an impact on our economy. In essence, the policy responses will
depend on the macroeconomic impact of the price movements. In this regard, the
effect of commodity price movements on inter alia the trade balance, aggregate
demand, exchange rate and fiscal developments are of paramount importance. From
a monetary policy perspective, our key concern is the possible impact on
inflation.

Food and oil prices are likely to remain an upside risk to the inflation
outlook in South Africa. Monetary policy has to be sensitive to the impact of
these developments on inflation expectations and we will act appropriately to
prevent the emergence of more generalised inflation. The South African Reserve
Bank remains committed to its primary mandate of ensuring price stability that
is the maintenance of CPIX inflation between the target ranges of three to six
percent.

Finally, commodities will retain a central role in the South African economy
in the future. A challenge facing our country, and one that is of particular
relevance to this audience, is to ensure that women also play their rightful
role in this area of economic activity. To this end the recognition of the
achievements of women plays a significant role in fostering their interest in
all sectors of the domestic economy.

Thank you.

Issued by: South African Reserve Bank
27 June 2007
Source: South African Reserve Bank (http://www.resbank.gov.za)