Chapter 2: South African socio-economic conditions

Question 1

Define Emerging markets:

Answer 1

Emerging markets are defined as economies that have low to middle income per capita, and have evolving (generally positively) political, financial and regulatory systems.

Question 2

FTSE classifies countries into three categories: (3)

Answer 2

1. Developed
2. Advanced emerging
3. Secondary emerging

Question 3

Within its FTSE Global Equity Index Series (GEIS c), FTSE classifies countries into three categories: (3)

Answer 3

1. Developed
2. Advanced emerging
3. Secondary emerging

Question 4

For South Africa, the key positive factors impacting economic growth include: (4)

Answer 4

1. A wide ranging social grant system that has done a lot to narrow the income disparity and increase consumption in the lower end of the market.
2. Increasing integration with the rest of Africa, especially exports of manufactured goods.
3. The growth potential associated with young population, but only if employment opportunities are available.
4. While government debt as a share of GDP is rising rapidly, foreign-currency denominated debt is relatively low.

Question 5

The main factors negatively impacting economic growth are: (9)

Answer 5

1. Currency volatility driven by poor relative macro fundamentals, risk aversion in emerging economies and idiosyncratic political risks, which are weighing on reform implementation.
2. Policy uncertainty around key issues such as property rights, proposed changes to regulation 28 and pressure on the Reserve Bank to intervene in the primary bond market.
3. An inflexible labour market and lack of competition in product markets.
4. Labour unrest.
5. Extremely high unemployment.
6. A wide and persistent income and wealth gap.
7. A constrained fiscal position
8. Structural damage effected by COVID-19, including a rise in bankruptcies and longer-term unemployment
9. Electricity supply constraints

Question 6

The main drivers of medium and long-term interest rates are:

Answer 6

1. The global economic outlook
2. The domestic economic outlook
3. The inflation outlook
4. The supply and demand for bonds

Question 7

What is the current net government debt as a percentage of GDP:

Answer 7

Net government debt as a percentage of GDP has increased from 21.8% of GDP in 2008/2009 to 63.5% in 2019/2022 and is estimated to be 81.1% in 2020/21, largely as a result of COVID-19.

Question 8

A number of factors make South Africa vulnerable to high inflation in the medium to long term, including: (5)

Answer 8

1. The political risk of a populist government abandoning fiscal rectitude.
2. The risk as a result of the association with other developing countries and the relatively low level of foreign exchange reserves potentially expose the currency to periodic pressures that have a destabilizing effect on exchange rates and prices.
3. The dependence of the economy - its exports particularly - on commodities makes it vulnerable to price shocks
4. The rigid labour market
5. A lack of competition in product markets