QUESTION THREE [40] Read the extract below and answer the questions that follow: The rand is on a run – here’s where it

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QUESTION THREE [40] Read the extract below and answer thequestions that follow: The rand is on a run – here’s where it couldbe heading towards the end of 2021 Global uncertainty has increasedover the past two months, unsettled by Covid-19 mutations and newlockdown restrictions, which is likely to impact the rand and otheremerging market currencies, says Nedbank. The frequent restrictionson economic activity in many parts of the world continue toaggravate supply shortages and transport bottlenecks, keepingprices of raw materials and intermediate goods elevated, the banksaid in a research note this week. “While temporary distortions,mainly pandemic-related disruptions, appear to cause globalinflation, the US will start to normalise monetary policy over thenext 12 months. This event will affect capital flows to theemerging market economies, but the impact could be less severe ifcommodity prices remain relatively firm and the global recoverycontinues. MASTER OF BUSINESS ADMINISTRATION – ACADEMIC ANDASSESSMENT CALENDAR - DISTANCE REGENT BUSINESS SCHOOL (RBS)-JANUARY 2022 68 “Given these counterbalancing forces, we haverevised our rand forecasts to reflect a more resilient picture overthe near term. We still expect a mild depreciation during the restof this year, followed by more significant weakness in 2022.” Thebank forecasts that the local unit will likely trade weaker towardsthe R14.83/dollar mark towards the end of 2021, increasing to theR15/dollar mark by mid-2022. Similar weakening is expected againstthe pound and euro, however not to the same extent as thegreenback. The below table shows the fully monthly exchange rateforecasts for the coming months MASTER OF BUSINESS ADMINISTRATION –ACADEMIC AND ASSESSMENT CALENDAR - DISTANCE REGENT BUSINESS SCHOOL(RBS)- JANUARY 2022 69 by Nedbank’s group economic unit. The SouthAfrican rand traded around R14.15 against the dollar, hovering atits strongest level since early July, as the greenback remainedsubdued, financial services firm Citadel noted. “The risk rallycontinues to bolster the performance of the local currency, asmarkets continue to position themselves for a Dovish Fed for longerthan expected,” it said. At 12h30 on Friday (10 September), therand was trading at the following levels again the majorcurrencies: Dollar/Rand: R14.11 (-0.35%) Pound/Rand: R19.57 (0.40%)Euro/Rand: R16.70 (-0.23%) Economic recovery In a separate researchnote, Nedbank said that it expects local economic recovery, even ifthe country is to see a fourth wave of Covid-19 infections andfurther lockdown restrictions at the end of 2021. This comes afterthe economy fared better than expected in the first half of theyear, expanding by 7.5% year-on-year. “We still expect a weakerperformance in the third quarter, reflecting the impact of stricterlockdown and the destructive riots in Kwazulu-Natal and parts ofGauteng. “The monthly statistics reflect sharp declines in July,but new vehicle sales and the purchasing managers’ indices point toa convincing return to growth in August, which is likely to gatherpace in September. The recovery should broaden over the finalquarter even if the country were to experience another wave of newcases and tighter restrictions.” Much of the momentum will continueto come from exports and consumer spending, Nedbank said. It addedthat the ongoing global recovery, coupled with elevated MASTER OFBUSINESS ADMINISTRATION – ACADEMIC AND ASSESSMENT CALENDAR -DISTANCE REGENT BUSINESS SCHOOL (RBS)- JANUARY 2022 70 commodityprices, will continue to underpin exports. At the same time,subdued inflation, low-interest rates and moderate-income growthwill support consumer spending. The turnaround in fixed investmentis encouraging, supporting anecdotal reports pointing to anincreased workflow for construction companies. However, the pace ofrecovery in fixed investment off these low levels will be slow,continually undermined by ample spare capacity, weak confidence,electricity shortages and structural constraints, it said. “Giventhe government’s stretched finances, spending is likely to remainrelatively stagnant. Within the context of the revisions and thestronger first half, GDP growth of over 5% now seems plausible for2021.” The South African economy advanced by 19.3% year-on-year inthe second quarter, after a downwardly revised 2.6 % decline in theprevious period, comfortably beating market expectations of 17.5%,Citadel pointed out. “It was the strongest expansion on record,coming off a low base from last year, and further assisted by therelaxation of lockdown restrictions amid the Covid-19 pandemic.”(Source:https://businesstech.co.za/news/banking ... d-of-2021/)3.1 Explain, with the aid of a diagram, the impact of adepreciation of the rand on the South African economy. (15)