Remarks by Mr TT Mboweni, Governor of the South African Reserve Bank, at The Economist’s Fourth Business Roundtable with the Government of South Africa, 21 November 2005, Johannesburg  1. It is difficult to quantify the exact potential of “hot money” outflows. Undoubtely there is some of it in South Africa, similar to any other high-yielding emerging-market country with a liquid currency market.  2.  Some rough indications of potential “hot money” are the following: 2.1 the high turnover in the foreign exchange swaps market, with mainly non-resident clients as counterparties.2.2 some build-up in authorised dealers’ net forward commitments against rand2.3 non-residents have increased their holdings of domestic bonds and equities by some R45 billion in the current year to date. 3.   South Africa’s current account deficit is financed by (predominantly) foreign portfolio investments which can be easily reversed, while foreign direct investment is generally regarded as being more stable. However, two observations can be made in this regard: 3.1  The IMF in March 2005 published a study entitled “The composition of capital flows: Is South Africa different?” This paper argued that ZAR stability and some changes to government policies could contribute to greater FDI. The paper noted, however, the SA attracted three times more foreign portfolio investment than any emerging-market country, as a percentage of GDP. Equity flows to South Africa remained well above levels in other developing and emerging markets. The composition of capital flows to South Africa appears to be quite the opposite of other emerging markets. Importantly, it is noted that South Africa has attracted portfolio inflows more consistently than other countries. 3.2 There are indications that FDI might increase (Absa/ Barclays, Vodafone) as we sustain healthy growth rates, the exchange rate becomes more stable and exchange controls are relaxed further and eventually abolished. 4.  The rand has become more stable: ZAR volatility has declined over recent months – historical volatility down from as high as 30 per cent in the middle of 2003 to below 10 per cent in October 2005 5.  Behaviour of importers and exporters has become more rational – Balances in CFC accounts stay fairly constant, whereas during 2001 and 2002, there tended to be build-ups in balances as exporters anticipated the ZAR to depreciate. The average holding period of export proceeds is also healthily within the 180 day limit, and remaining fairly stable. 6.  A number of stuctural empediments that contributed to the ZAR’s volatility in the past have been removed or improved. E.g. the closure of the NOFP, and the building of international reserves to USD20 billion. This has improved the fundamental value of the ZAR, and also resulted in upgrades by the international ratings agencies. These factors contribute to the ZAR becoming a longer-term investment destination rather than attracting predominantly “hot money”. 7.  “Hot money” often tends to be a reference to speculative flows, which can sometimes negatively affect a country. The best way to protect oneself from detrimental speculative flows is for South Africa to continue on its path of responsible, predictable, consistent and transparent policies. Can the economy pick up speed with such a strong currency? 8.  International research on the relationship between the exchange rate and growth remains inconclusive to date, as it is difficult to isolate the effect of the exchange rate from other policies and economic structures that would support or hamper growth. Typically, some sectors gain from a strong exchange rate, while others lose. 9. There are a number of indicators that provide some comfort that the South African economy is coping well with an exchange rate at the current levels, e.g. GDP growth of some 4,8% (quarter on quarter saar) and relatively strong manufacturing growth. 10.  The mining sector is usually particularly negatively affected by a strong exchange rate. However, the high commodity prices are providing some cushion in this regard.