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In this assignment our syndicate will explore the demand and supply of currencies, what causes the Rand to appreciate and depreciate with regard to domestic and global factors, fluctuations of the exchange rate and the impact it has on different spheres of the economy namely households, business, government (including the Balance of payments). We hope to demonstrate our understanding of these concepts by providing a detailed explanation of them in the assignment. 2.
The balance-of-payments (BOP) accounts of a country record the payments and receipts of the people of the country in their transactions with people of other countries. If all transactions are included, the payments and receipts of each country must be equal. I. E. Net Exports (NIX) always equal Net Capital Outflow (NCO). Although this is rarely the case. The BOP statement divides international transactions into three accounts: the current account, the change in reserve assets/capital account and the financial account.
The current account and financial account are impacted by export/import of goods and services. Every international transaction results in a credit and a debit. Any transaction that causes money to tool into a country is a credit, and any transaction that causes money to leave a country is a debit. Q: How many economists does it take to change a light bulb? A: Eight. One to screw it n and seven to hold everything else constant. Source: http://enter. Mac. AC. UK/ Joke. HTML When the US purchases South African diamonds, the AS Current Account will have a credit and the US current account a debit.
However AS will have a surplus of Dollars and so will purchase US assets example US Bonds. This transaction will be recorded in the financial account in the balance of payments. If South Africa buys US Dollars or any other foreign currency as an asset, then this is also recorded in the financial account. 2. 2. 1 Net Capital Flows If South Africa buys more US assets I. E. Invests more in the foreign market than what reign markets invest in South Africa, then South Africa has a POSITIVE net capital outflow.
According to our example in the Market for AS Diamonds in the US , if South Africa has a trade surplus or current account surplus with the US then it will have POSITIVE net capital outflow as it will use the surplus of US dollars to purchase US assets. 2. 2. 2 South Africans Current Account Deficit Please refer to Diagram 4 in the Appendix. A current account deficit means that a country is importing more goods and services than it exports. This is an indication that an economy is “investing more than it is saving” and is borrowing from other economies to finance its spending.
We are an emerging/developing economy so we borrow in order to produce more BUT our current account deficit is growing – and this is concerning. This is an indication that our economy is “unbalanced” and the governments’ efforts to redress this imbalance can be seen as they try to grow our local manufacturing industry. The deficits have been among the main reasons for the recent rand weakness as investors worry about South Africans ability to finance them. We will now examine developments in the foreign exchange markets and how they have impacted South Africa. 3.
We have greater ” financial volatility because we swing between economic prosperity and economic decline. ” The USED, GAP and Euro (EURO) are currencies of the most stable economies in the world and are predictable and considered a ‘safe bet’ by investors. Their currencies float freely. China however pegs its currency to the USED and deliberately keeps the YUAN weaker than the USED so that it can encourage exports of its goods and services. Please refer to Diagram 5&6. From Mid 2010 we see a consolidation or recovery of most countries from the 2008 Global Recession.
This is due to the 2010 FIFE World Cup that created positive sentiment toward AS. This also created investor confidence which led to steady Direct Foreign Investment. This event was an ideal marketing platform for the tourism sector in AS. We see a peak in tourism during the World Cup. (Diagram AAA) This growth culminated at the end of 2010 (Diagram b), this foreign interest increased the demand for AS goods and services which in turn increased the demand for the CAR which caused an appreciation of the CAR against foreign currencies.
After this period due to the exodus of the tourists and South Africans spending their disposable income on summer vacation the exchange rate depreciated diagram 8 (black box). Please refer to diagram 8 (red box) from the appendix. From 2011 the Sara’s standing loses ground against foreign currencies and this can be attributed to the political atmosphere in AS during this period, Government’s failure to take a stand against Julius Male and the NANCY created speculation in foreign investment, causing foreign investors to retract out of AS. Ђ Julius Male’s call for Nationalization of mines along with land grabs and labor unrests especially in the mining sector Marinara), affected the investments in this sector and devalued the rand (“CAR depreciated by 11% against the USED” after the Marinara Massacre) A study of economics usually reveals that the best time to buy anything is last year. Source: http://enter. Mac. AC. UK/Joke. HTML The lack of clarity in the ruling party’s future policies. E. G. Mining, tax relief etc. Bettor the A C presidential elections (Managing) weakened investor confidence. . 1 Impact on South Africans Balance of Payments The Rand has depreciated due to global and domestic factors like mine worker strikes and therefore “work stoppages”. This will also potentially disrupt supply of electricity and therefore hampers our exports. Violent mining strikes caused reduction in output from our mining sector which impacted our GAP and mineral exports negatively. Unfortunately, this means our current account deficit will increase due to the decrease of South African exports which was measured at of GAP in 2012. . 2 Impact of the Exchange Rate on different Spheres of the AS economy Changes in the exchange rate impact the South African economy in different ways. Some sectors benefit while other sectors “feel the pinch”. Any sector involved in import seems to experience negative effects while those sectors involved in exporting seem to benefit – in the short term. 3. 2. 1 Business IMPORTS Due to the South African Rand depreciating, the oil price rockets and therefore businesses spend more at the petrol pump.
This increases daily operational costs that can either result in profit margins being reduced so businesses can stay competitive or these costs can be passed on to the consumer. Imported goods or services are more expensive to South African Businesses. Again, input costs are higher and therefore make it difficult for South African businesses to compete in the international market. In the long-run, there’s Just another short-run.. Source : http://enter. Mac. AC. K/ Also, due to the negative impact on the country’s GAP, this will lead to an erosion of the profit margin which in turn leads to a cycle of cost cutting and has the detrimental result of increased unemployment. EXPORTS If the Rand is too volatile, strategic future planning for businesses become difficult. For example the Manufacturing Circle’s Chair Stewart Jennings says that they find it difficult to make decisions around investing for exports due to the fluctuation of the Rand Trade and Industry Minister b
R Davies NAS also said that the Rand’s depreciation would help increase the demand for the now cheaper South African goods and services so exporters would benefit. BUT, currently, the demand for goods and services from Europe has decreased due to the economic crisis facing the Rezone. VOLATILITY An increase in exports is only a temporary reprieve. Bloomberg has stated the following about the volatility of the Rand: “If it spikes up then rallies sharply back again all it has done is squeeze people out of the market. ” 3. 2. 2 Government The South African Reserve bank manages monetary policy in South Africa.
Its primary objective is to “achieve and maintain price stability’ so that we have economic growth and development that is sustainable. This will ensure that all South Africans, especially the poor, are “protected” in terms of purchasing power because they cannot keep up with prices that increase on a continuous basis. Recently, the South African Rand has been extremely volatile due to the issues experienced in the Rezone. Finance Minister Pravda Gordian has also said that the global stage is “driven by external events that are beyond our control” so it is difficult to “stabilize” our currency.