Chapter 2

Question 1

Positive factors impacting economic growth in SA

Answer 1

1. Wide ranging social grants system
2. Increasing integration with rest of Africa
3. Growth potential associated with young population
4. Foreign denominated debt is relatively low
5. Robust commodity prices
6. Progress in economic reform measures
7. Presidency’s five year operation Vulindlela

Question 2

Negative factors impacting economic growth in SA

Answer 2

1. Currency volatility
   - Poor relative macro fundamentals
   - Risk aversion in emerging economies
   - Political risks
2. Policy uncertainty around key issues such as:
   - Property rights
   - Proposed changes to Reg 28
   - Pressure on reserve bank to intervene in the primary bond market
3. Inflexible labor market and lack of competition in product markets
4. Labor unrest
5. High unemployment
6. Income and wealth gap
7. Electricity supply constraints
8. Structural damage effected by COVID-19, including a rise in bankruptcies and longer-term unemployment

Question 3

Constraints of long term economic growth

Answer 3

1. High unemployment
2. Skills shortages
3. Extensive poverty
4. Large inequality
5. Reduced fiscal space

Question 4

Drivers of medium/long term interest rates

Answer 4

1. Global economic outlook
2. Domestic economic outlook
3. Inflation outlook
4. Supply and demand for bonds

Question 5

Drivers of short term interest rates

Answer 5

1. Repo and prime interest rates

Current repo rate = 7.25%
Current prime rate = 7.75%

Question 6

Causes of high inflation in SA

Answer 6

SA’s exposure to input-driven cost inflation and high administration costs (partly as a result of Government inefficiencies)

1. Political risk of populist government abandoning fiscal rectitude.
2. The dependence of the economy, particularly exports, on commodities, which makes it vulnerable to existing price shocks
3. The rigid labor market
4. A lack of competition in product markets
5. An upward revision in oil price, which will impact cost inflation

Question 7

Link between demographic rates and income

Answer 7

1. PH lapse rates much higher in low-income markets
2. Degree of inequality in income and services further translates into significant differences in mortality and morbidity rates

Question 8

Why might a forced sale of RSA government bonds occur following a ratings downgrade to junk status

Answer 8

1. Large portion of bonds are held by offshore investors
   - Some of these investors will have mandates that prevent them from investing in non-investment grade assets
2. RSA bonds may also be removed from global indices because of the downgrade
   - Would require forced sales of bonds by companies tracking these indices