Question

South Africa Reserve bank highlighted significant macroeconomic variables affecting the economy, which are the exchange rate and interest rate. Critically review how the recent macroeconomic changes (interest rate and exchange rate) have affected your enterprise or business unit of your choice? Your answer must start by explaining the nature of business or sector of the company/organisation, followed by a critical review of the impact of exchange rate and interest rate changes on the business/organisation. (Approx. 2.5 pages)

Answer 1

NATURE OF BUSINESS

regular process ,economic activity , capital requirement, deal in goods and services, export import products, involve buyers and sellers

exchange rate

The exchange rate will play an important role for firms who export goods and import raw materials. Essentially:

• A depreciation (devaluation) will make exports cheaper and exporting firms will benefit.
  • However, firms importing raw materials will face higher costs of imports.
• An appreciation makes exports more expensive and reduces the competitiveness of exporting firms.
  • However, at least raw materials (e.g. oil) will be cheaper following an appreciation.

The downside of a depreciation is that firms who import raw materials will see an increase in the cost of buying raw materials. If the car company imports engines from other country to make the car, it will have to pay more to buy the engines. This will reduce its profit margin.similarly in case of appreciation who import will see decrease in cost of raw material.In the long term, it is argued that a depreciation may reduce the incentives for exports to cut costs. The depreciation enables an ‘easy’ increase in their profit margin. As a result, there may be less incentive to cut costs and boost productivity. If a firm is facing an appreciation, then they may face a greater incentive to cut costs.

Impact on incentives

In the long term, it is argued that a depreciation may reduce the incentives for exports to cut costs. The depreciation enables an ‘easy’ increase in their profit margin. As a result, there may be less incentive to cut costs and boost productivity. If a firm is facing an appreciation, then they may face a greater incentive to cut costs

interest rate

.When interest rates rise, banks charge more for business loans. This means you'll need to use more of your earnings to pay interest on your loans, which decreases profits. You might decide not to start new projects or expansions during periods of high interest rates, which hampers the growth of the company.When interest remains low, businesses can borrow more readily. Low-interest loans can fund business growth and increase profitability because businesses can earn enough off of new ventures to pay for the loan interest and have money left over for profits.

Customers' Ability to Pay

Customers have to pay interest on their personal loans, home loans and car loans. The higher the interest, the less money in customers' pockets. This can reduce their ability to buy products and services, so businesses may suffer from a decrease in sales.When interest rates remain low, customers have more cash after they pay their loan payments, and they can spend this cash with businesses. This principle applies whether your customers are the public or other businesses. Both have to pay interest on their loans, so the lower the interest, the more they can buy.

Boosting Business Investment

Businesses can invest their excess cash in interest-bearing accounts to make more money. During periods of high interest rates, businesses earn more from these investments.When rates are low, businesses may be more likely to use their cash for new equipment and plant improvements. While this can be good for equipment sellers and construction firms, banks lose out. Banks make their money from providing loans. When they don't get business investments to boost their assets, they can't make as much money because they have less to loan out

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