Address by Dr Chris Stals, Governor of the South African Reserve Bank at a South African Investment Conference arranged by Donaldson, Lufkin & Jenrette in conjunction with Frankel Pollak/Auerbach Grayson, New York. 1. Macroeconomic backgroundThe South African economy staged a remarkable recovery since the election of the Government of National Unity in April 1994. After a decade of virtual economic stagnation with average real growth of less than one per cent per year in gross domestic product, the economy rebounded strongly to expand at a seasonally adjusted annualised rate of 5,5 per cent in the second half of 1994. In the first half of 1995, however, adverse climatic conditions reduced production in agriculture while a relatively sharp decline also occurred in gold-mining production. The result was that the total value added by the primary sector of the economy, declined by 18 per cent and the annualised rate of growth in overall production contracted to only 1 per cent. The secondary sector, however, and particularly manufacturing, continued with steady expansion and maintained overall growth of more than 5 per cent per annum. This was well supported by a continued expansion at a rate of about 3,5 per cent in the services sector. Increased production was stimulated by robust domestic demand for goods and services as well as a further increase in the volume of merchandise exports. Private consumption expenditure has been on an expansion path for almost two years now, growing by a steady 3,5 per cent per annum. It is encouraging to note also that gross domestic fixed investment in all the major sectors of the economy, has made an important contribution to the current economic upswing. At this juncture, total gross domestic fixed investment is expanding at a rate of 8,5 per cent per annum. It is furthermore noteworthy to emphasise that current government consumption expenditure remains well constrained and has indeed in real terms declined slightly during the first half of 1995, creating more scope for continued private sector expansion.The upsurge in domestic demand spilled over into imports with the result that the current account of the balance of payments moved into a deficit in the third quarter of 1994. Over the twelve months up to June 1995, the deficit amounted to R8 billion. In the second quarter of 1995, the current account deficit had risen to a seasonally adjusted annualised rate of R12,5 billion, equal to about 2,5 per cent of gross domestic product. The growing current account deficit provided no foreign exchange funding problem as the net capital inflows over the past year surged to a total of more than R18 billion. Although this total capital inflow was more or less equally divided between short- and long-term funds, indications are that more medium- and long-term funds are now flowing in, particularly after international sovereign credit ratings for South Africa were established late last year and the Government and other public sector institutions re-entered the international capital markets for public issues. With the net capital inflow exceeding the current account deficit, the official foreign reserves increased by more than R10 billion over the fifteen months from June 1994 to August 1995. At the present level of about R15 billion, the gross foreign reserves still account for only about six weeks' imports, and it remains an important policy objective to increase the foreign reserves further.The exchange rate of the rand remained relatively stable over the past year. Against the background of rather volatile exchange rate changes amongst the currencies of the major industrial countries, the average weighted value of the rand against a basket of the currencies of South Africa's major trading partners depreciated by only 1,5 per cent from June 1994 up to August 1995. The rand remained remarkably stable after the abolition of the financial rand on 1995-03-13 and to the surprise of many observers, appreciated slightly by 1,0 per cent up to the end of September. The improvement in overall economic condit