Question

Read the online news article on SA’s “rand and interest rate” below and answer questions 2(a), (2b) and 3.

Where are the rand and interest rates headed? Apr 12 2018 07:39 Mariam Isa

The ousting of former President Jacob Zuma at the start of this year and the swift action taken by his successor, Cyril Ramaphosa, to root out corruption and address government mismanagement sparked a surge in business confidence, which has significantly improved South Africa’s growth outlook.
But the dramatic turnaround in sentiment has yet to translate into the reforms needed to generate enough private investment to make significant inroads into unemployment, restore social cohesion and put the economy on a sustainable path of much faster growth.
The decision by Moody’s Investors Service to keep the country’s sovereign credit rating at investment grade and change the outlook on its assessment to stable from negative has removed the threat of a foreign sell-off in government bonds, boosting the rand and prompting a welcome interest rate cut by the Reserve Bank.
But minister of Finance Nhlanhla Nene has cautioned against the groundswell of euphoria.
“I would want to call this a honeymoon phase, and it is for that reason we cannot be complacent about it […] We do need to take our agenda forward,” he said in an interview on the radio station 702 on 26 March.
Standard & Poor’s made that point in a report released the following day, even though it doubled its growth forecast for the country this year to 2% – well above the Reserve Bank’s latest forecast – and boosted its estimate for next year to 2.1% from 1.7%.
The rating agency questioned how quickly reform efforts would ease the structural constraints to economic growth – notably labour and product-market inefficiencies, poor education outcomes and a skills shortage.
Nonetheless, the rating agency said it no longer saw SA as among the “fragile five” emerging markets, which would be most vulnerable to higher interest rates in developed economies.

Reserve Bank Governor, Lesetja Kganyago was also circumspect when he announced the monetary policy committee’s (MPC’s) decision on 28 March to trim its key repo rate to 6.5%, warning that while the growth outlook was more positive, it was “still challenging”, as it was driven mainly by increased confidence.
He also noted that the rand, which had appreciated by 4.8% to the dollar in the past two months, was “somewhat overvalued” and further strengthening potential was probably limited.
He told reporters after the announcement that there had been “heated debate” over the decision to cut the repo rate, with four members of the MPC arguing for the step and three in favour of holding it steady.
That means further interest rate cuts are unlikely this year, and there could even be hikes in 2019, which will dampen business and consumer optimism.
“The private sector underinvested for the last three years,” said Stanlib Chief Economist Kevin Lings.
“Because the currency is strong, this is a good time to upgrade machines – there is restocking of inventory levels across most sectors.
“What we are not hearing is significant expansion plans. The government balance sheet prevents it from stimulating the economy – it has to come from the private sector.”
Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.
This article is part of the cover story that originally appeared in the 12 April edition of finweek.

Question 2              [30 Marks]

a) The article outlines the motivations and actions predicted for the South African Reserve Bank (SARB) when they make a decision of increasing or decreasing “interest rates”. Discuss the monetary transmission mechanism when the Reserve Bank DECREASES the Repurchase (repo) rate.           [15 Marks]




b) In the article, The SARB Governor highlighted two major macroeconomic variables affecting the economy, which are, exchange rate and interest rate. Critically review how the recent macroeconomic policy change (interest rate and exchange rate) has affected a particular 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.            [15 Marks]


Question 3              [20 Marks]

The author, in her/his conclusion, highlighted the challenges facing the economy in a statement: “What we are not hearing is significant expansion plans. The government balance sheet prevents it from stimulating the economy – it has to come from the private sector.”

As an economist, you have been tasked to explain to a business forum how investment can be used to expand the economy. In your presentation, critically review four factors directly linked to investment and how this causes a shift in aggregate demand (AD) curve.     [20 Marks]

(1 mark for each identified factor 4 marks for explaining each factor).

Answer 1

A) When the Moody’s Investors Service to keep the country’s sovereign credit rating at investment grade and change the outlook on its assessment to stable from negative has removed the threat of a foreign sell-off in government bonds, boosting the rand and prompting a welcome interest rate cut by the Reserve Bank. Finance Minister said we do need to take our agenda forward,” he said in an interview on the radio station 702 on 26 March.
Standard & Poor’s made that point in a report released the following day, even though it doubled its growth forecast for the country this year to 2% – well above the Reserve Bank’s latest forecast – and boosted its estimate for next year to 2.1% from 1.7%.

SARB also noted that the rand, which had appreciated by 4.8% to the dollar in the past two months, was “somewhat overvalued” and further strengthening potential was probably limited.
He told reporters after the announcement that there had been “heated debate” over the decision to cut the repo rate, with four members of the MPC arguing for the step and three in favour of holding it steady.

B)  Interest rate cuts are unlikely this year, and there could even be hikes in 2019, which will dampen business and consumer optimism. The private sector underinvested for the last three years,” said Stanlib Chief Economist Kevin Lings. “Because the currency is strong, this is a good time to upgrade machines – there is restocking of inventory levels across most sectors.