Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Annual General Meeting of the French Chamber of Commerce and Industries, Johannesburg. 1. Integration in the global financial marketsThe political and social reforms in South Africa over the past few years were accompanied by equally important changes in South Africa's international financial relations. Important steps even preceded the election of the Government of National Unity in April 1994, when South Africa terminated the Debt Standstill arrangements of 1985 at the beginning of 1994. In terms of that decision, exchange controls on non-residents were partly lifted when restrictions on the repayment of certain blocked loan funds of foreign lenders were removed in terms of a final rescheduling agreement entered into with South Africa's foreign creditors. After the election of the Government of National Unity, international sanctions and boycotts were removed, international restrictions on new loans and investments in South Africa were lifted, and South African banking institutions and importers and exporters gained access again to international money markets. The initial reaction was for a large inflow of short-term foreign capital into the country. In the third quarter of 1994, for example, the net inflow of short-term funds amounted to more than R4 billion. The way was also opened for South Africa to re-access the capital markets of the world when Moody's and Standard and Poor's, and at a later stage Nippon Investors Service of Japan, gave South Africa international credit ratings which enabled South African borrowers to raise new funds through international public issues. In the fourth quarter of 1994, a net amount of R4,7 billion of long-term capital flowed into South Africa, to raise the total net inflow of funds from abroad in the second half of 1994 to just over R9 billion. A third major event took place in March 1995 when South Africa abolished the financial rand system to remove the remaining exchange controls applicable to non-residents. This was followed by some substantial inflows of portfolio foreign investments in South African securities listed on the Johannesburg Stock Exchange, to add to the inflows of short-term bank and trade financing and also medium-term loan funds. A total net inflow of capital of almost R22 billion was established for the calendar year 1995, which included an inflow of just over R6 billion invested in South African securities through the Johannesburg Stock Exchange. The total net inflow of capital in the eighteen months from the middle of 1994 up to the end of 1995 therefore amounted to more than R30 billion. 2. Direct consequences of the capital inflowsThese capital inflows had a few important con-sequences for the South African economy.Firstly, after years of persistent net outflows of capital, South Africa could now again afford to let the domestic economy expand at a more rapid rate. Domestic expenditure in particular increased in real terms by 6,7 per cent in 1994, and by a further 5,6 per cent in 1995. As a result of the sharp rise in the demand for goods and services, imports from the rest of the world increased sharply, and the current account of the balance of payments moved into a substantial deficit of R12,7 billion in 1995. This, however, created no problem as the inflows of capital provided the required foreign exchange to cover the deficit.Secondly, with the capital inflows exceeding the current account deficit, South Africa could, for the first time in years, again accumulate foreign reserves. At the time of the election in April 1994, the Reserve Bank held about R8½ billion in foreign reserves, but also had a similar amount of short-term foreign loans outstanding. At the end of 1995, the Reserve Bank's foreign assets amounted to R15½ billion, with zero foreign liabilities outstanding. Thirdly, because of the capital inflows, the exchange rate of the rand remained relatively strong in 1995. In nominal terms, the average weighted value of the rand against a basket of the more important fo