Honoured guests

Nominees, their colleagues and Treasurers

Members of the Bond Exchange of South Africa

Members of the press

Sponsors of the Spire Awards and organisers of this prestigious event

1. Introduction

Time flies, and once again we gather here tonight to celebrate another successful year in the South African bond market, filled with vigorous activity and continuous innovation. In celebrating this, we again have an opportunity to recognise those individuals and organisations for whom 2006 was a particularly fruitful year of outstanding achievement. I wish to extend my sincere congratulations to the winners of the awards handed out tonight. It is the dedication and hard work of professionals such as yourselves who contribute to the success of the bond market, which counts among the most developed and liquid in the emerging-market arena.

However, allow me also to congratulate all the nominees, whether they receive a trophy or not, as well as those who have looked beyond themselves and their own interests to nominate others, and those who have worked unobserved in the background, supporting and contributing to the successes of the winners. A special word of appreciation to the Bond Exchange of South Africa (Besa), for hosting this event and acknowledging excellence in our bond market is also fitting.

2. Significance of the Spire Awards: embracing the nature of markets

Tonight marks the fifth year of Spire Awards. According to the description of Besa, these awards “recognise those individuals and teams who have used talent, intelligence and commitment to contribute to the bond market in South Africa.” The award categories have also been expanded this year to cover the entire value chain of the debt market - from borrower to broker, research to sales, origination to media reporting.

While preparing this speech, a particular aspect of the description of Besa of the Spire Awards struck me, namely how it encompasses both the collective and competitive nature of markets – two characteristics that seem to contradict each other, yet cannot be separated. Allow me to share some views on this.

Markets, as we know, are inherently interdependent. Although many individuals, individual teams or individual organisations are rewarded for their excellence tonight, the very concept of a market is a collective one: no deal can be matched without an opposite position, there cannot be a sale without a purchase, a trade cannot be effected if it is not settled, no settlement can take place without a clearing system, no money can flow without a banking system or a national payments system. Each individual participant in the market provides a source of demand, supply, pricing, research, technical support and innovation. People and organisations rely on each other to trade, to make profits, to earn fees, to provide information and to provide opportunities to excel.

This interdependence is finely balanced.  Whenever one individual, one team or one organisation starts to permanently dominate a market, the system tends to become inefficient. In such circumstances, markets may become merely a mechanism to advance the interests of individuals or members of a select group, at the expense of the broader community.

I commend Besa for making the categories for the Spire Awards broad enough to acknowledge a wide variety of market participants in various areas, to ensure that different kinds of contributions are recognised and to give opportunities to both newcomers and veterans to make their mark. The awards strive to give recognition to those who have used their talent, commitment and hard work not only for their own benefit, but to the benefit of their clients, their organisations, the bond market as a whole and even the country at large.

However, although market participants are heavily dependent on each other, they also have to be competitive. It would be very naïve to expect financial market participants to trade for the altruistic purpose of promoting the broader market. Naturally, everybody is in the game to win, and not everybody can be on the winning side - one trader’s profit is usually another’s loss. It is the competitive nature of markets that contributes to their efficiency: as each market participant tries to outsmart the other, the market as a whole becomes more innovative, information is disseminated more efficiently and is better analysed, the quality of service improves, costs are lowered and communication improves. The key is, as with most things, to balance competition and co-operation to the benefit of the wider community.

3. Recent developments and outlook for the domestic bond market

Well-functioning and efficient capital markets are an important element in economic development. They facilitate the mobilisation of capital to be channeled to job-creating business enterprises, long-term infrastructure development and social upliftment. They contribute to the development of the financial system as a whole and play an important role in attracting foreign investment. Liquid and efficient capital markets lower the cost of funding, making many more projects viable and contributing to overall economic growth. South Africa is fortunate to benefit from a relatively deep and broad bond market, which is increasingly accessed by non-government institutions. In this respect, Besa has played an invaluable role.

I would refrain from giving a detailed overview of recent developments in the domestic bond market to such a well-informed audience as we have here tonight. Suffice to say that the domestic bond market has enjoyed a long and almost uninterrupted rally over the past few years, with yields on the benchmark government bonds breaking a succession of record lows until the first quarter of this year. Yields have subsequently risen somewhat, in line with the tighter monetary policy stance taken by the SARB since June 2006 and some re-pricing of emerging-market risk in global markets.

However, despite this recent retracement, I believe that we have entered a period of structurally lower yields, due to a number of fundamental factors. The most obvious one that springs to mind is the continued fiscal discipline of the government, which has significantly reduced the budget deficit and borrowing requirement. The lower issuance of government bonds provides some space for corporate and parastatal entities to raise capital. In addition, South Africa enjoys a higher credit rating than it did in the past, partly due to the efforts to increase the country’s official gold and foreign exchange reserves to levels more comparable to those of our peers.

A third and very important factor that can be mentioned is that the CPIX inflation rate has been within the target band of between three and six per cent since September 2003. The inflation-targeting framework adopted by South Africa in 2000 has succeeded in anchoring inflation expectations and, as a result, long-term bond yields are likely to remain at moderate levels. It is with this in mind that many issuers have found it particularly attractive to issue at the long end of the curve.

We are all acutely aware of the risks facing our current inflation outlook, which has convinced the Monetary Policy Committee (MPC) of the Reserve Bank to increase the repo rate by 150 basis points since June 2006. These risks have, once again, been highlighted in the latest statement of the MPC. Nevertheless, I believe that the structural and fundamental factors providing strength to the domestic bond market should continue to support economic growth and weather the storms of financial market volatility globally, despite the shorter-term noise of interest-rate cycles or cyclical changes in investor sentiment and risk appetite globally. There are also a number of initiatives underway in terms of new products and processes, which shows that the bond market remains dynamic and is keeping pace with international trends.

In the year to the end of September 2006, turnover on Besa surpassed the R10 trillion mark, already exceeding the R9,8 trillion turnover in 2005. Around 20 per cent of this turnover can be attributed to transactions with non-residents. Over recent years, the net sales and purchases of South African bonds by non-residents add up to a more or less neutral position, therefore not making a significant contribution to the financing of the current account deficit over a medium-term horizon. In fact, net equity purchases account for the bulk of South Africa’s foreign portfolio investment inflows over time. Still, in the year to mid-October, non-residents have been net buyers of around R18 billion worth of South African bonds. In addition, non-residents contribute significantly to the liquidity of the domestic bond market, in that way improving market depth and encouraging the continued development and innovation in our market.

However, as an open emerging-market economy we are always vulnerable to changes in international sentiment, and cannot afford to be too complacent. In addition to risks emanating from our own economy, South African financial markets are also subject to external factors over which the country has very little control. Let us not forget that the global economy is still flush with liquidity, that the risk premia priced into riskier assets such as equities and emerging-market assets are still relatively low for most emerging markets, despite some repricing during 2006, and that monetary policy in the developed world and at home cannot currently be described as tight by historical standards. In addition, the appetite for South African financial assets is, to a large extent, influenced by developments in global bond and equity markets, with definite risks for our own balance of payments position. Monetary policy has to take cognisance of these global effects, which could potentially lower the demand of non-residents for South African financial assets and, in turn, affect the exchange rate and, ultimately, inflation.

4. Conclusion

Despite this note of caution, I believe we have much to celebrate tonight, and I shall not delay it any longer.

Let me conclude, then, by once again congratulating all the deserving nominees present, and by wishing you all a similarly prosperous and successful year in 2007.