It is almost twelve years ago that South Africa, in August 1985, had no choice but to introduce a temporary standstill on the repayment of a large part of its outstanding foreign debt, amounting in total to about $24 billion at that time. The part affected by the standstill arrangements amounted to $13,6 billion.
In the frustrating subsequent negotiations with foreign creditors, South Africa's attitude was:
on the outstanding balance at a market rate;to accept full responsibility for the repayment of the debt, and interest
to find a formula for the gradual repayment of the affected debt at a pace that the weak South African balance of payments position of that time could absorb; and
to retain the goodwill and the understanding of the international banking community for a dilemma which was not created by bad macroeconomic management, or by any inherent weakness of the economy, but rather by the internal political problems of our country.
The approach of the South African Debt Standstill Committee was not to burn bridges behind us, but to retain the friendship of the international banking community in the belief that they will one day again become lenders to South Africa. Our trust in the bankers, and confidence in the future of South Africa, have been vindicated by the developments of the past three years.
The signing of this Agreement today with a group of banking institutions representative of the world banking community, and being in many cases the same banks that were offended and affected by the events of August 1985, marks the full turning of the wheel of destiny. For me, as Chairman of the now defunct Debt Standstill Committee, this is indeed the fulfilment of a goal that I always believed in, and supported with the policies followed and implemented by the South African Reserve Bank over a long period of time.
2. A facility for the future
The new South Africa, however, is about the future. The creation of this new Credit Facility marks one further step in the process of integrating the South African financial markets in the global system. South Africa wants to be part of this global system because we must assure for our country regular access to the surplus savings of the more developed nations of the world, in order to supplement the relatively low level of domestic savings with an inflow of foreign capital. Without such an inflow of capital, South Africa will not be able to maintain economic growth and development at a level that will create the jobs we need for our growing population. Without foreign capital, the South African economy cannot provide in the many legitimate needs of its impoverished people.
Over the past few years, South Africa therefore deliberately encouraged the reintegration of the South African economy into the world markets. Relatively large inflows of foreign capital in the form of short-term finance, medium- and long-term loan capital, portfolio investments and, to a lesser extent, direct investments, were used partly to replenish the country's foreign reserves, and partly to phase out exchange controls. In the process of phasing out the exchange controls, we have succeeded in:
removing all effective exchange controls on current account transactions;
removing all exchange controls applicable to non-residents including the abolition of the financial rand system;
allowing South African corporates to invest about R20 billion in off-shore subsidiaries, branches and joint ventures;
enabling South African institutional investors to diversify about R30 billion of their assets into foreign currency denominated investments; and
since 1997-07-01, allowing private South African individuals to transfer up to R200 000 per individual out of the country for investment in other countries.
The net foreign reserves of the Reserve Bank were raised from zero in April 1994 to about $5 billion at the end of June this year.
The reintegration of South Africa in the world financial markets brought with it new challenges, particularly because of the volatility and unpredictability of large capital movements into and out of the country. These capital movements are often influenced by developments in other emerging market economies and are extremely difficult to control by any individual country forming part of this group of developing economies.
The globalisation of the financial markets also exposes the political, social and economic developments in each individual country much more to critical assessments by the international investor community. For countries in transformation, or involved in major political and social reforms, foreign capital movements can be very fickle.
3. Purpose of the new facility
The new credit facility of $1,75 billion now established by the Reserve Bank is intended for overall balance of payments purposes only, and not for any spending in the South African domestic economy. It is important, in the environment of large capital movements and greater exchange rate volatility, for the Reserve Bank to have sufficient liquidity in its international reserves to support the market in foreign exchange from time to time. South Africa cannot and will not fix the exchange rate of the rand at any predetermined level, but the Reserve Bank will continue in its efforts to smooth out short-term fluctuations and to make sure that sudden and identifiable legitimate large demands for foreign exchange will be met at all times.
The new credit facility will also replace part of the existing bilateral credit facilities of about R17 billion established by the Reserve Bank over many years with a great number of foreign banking and other financial institutions. Total credit facilities that will now amount to close on R20 billion, plus foreign reserves of a similar amount, place the Reserve Bank in a more comfortable position to ensure that orderly conditions will be maintained in the South African foreign exchange market.
The Reserve Bank's credit facilities form a second line of defence next to the official foreign reserves to protect the South African balance of payments in times of need. These facilities are, however, not intended to replace the International Monetary Fund as an important source of support in times of serious balance of payments problems. Negotiations with the International Monetary Fund can, however, be very tedious and cumbersome and also involve political issues over which the Reserve Bank has little control. The credit facilities established by the Bank therefore provide it with a buffer that can be used in times of need pending the outcome of negotiations between the Government and the International Monetary Fund for stand-by facilities. They give the Reserve Bank, in other words, some greater flexibility in the implementation of overall monetary policy.
Finally, the facility will be used in the promotion of the overall objective of raising the economic performance of South Africa to a higher level that will enable the country to create more jobs for its people.
I therefore thank all the participating banks for the contribution each one of you made to the success of this first-ever Syndicated Loan Issue made by the South African Reserve Bank. Your contributions provide further assistance, not only in the interest of economic development in South Africa, but in support of the development of the whole Southern African region.
I want to thank my two colleagues, James Cross and Bertus van Zyl, for all the hard work they have put into the negotiations to establish this credit facility. It is a great pleasure for me as Governor of the South African Reserve Bank to put my signature to the final agreement after all the work has been done. The world is, after all, run by people second in charge!
As over the past twelve years, South Africa may again go through difficult times in future, but will never let its creditors down.