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Following the downgrade of South Africa’s sovereign credit rating to BBB- in June 2014,
as well as a host of other recently published indicators reflecting negatively on the
prospects for the South African economy, the Rand depreciated substantially against
other major currencies during the past four months. Explain what impact this would have
on the current and financial accounts of the Balance of Payments. Limit your answer to
anticipated impacts on the Balance of Payments only.
in Economics by Diamond (39.7k points) | 10 views

1 Answer

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Due to the lower credit rating investment in South Africa is likely to decrease
() (due to decreasing foreign investor confidence). On the financial account, both
foreign direct investment will decrease and portfolio investment is also likely to
decline, thereby decreasing the balance on the financial account.
With a lower balance on the financial account, South Africa will be less able to finance a
large deficit on the current account. Initially, due to SA’s high import propensity, the
deficit on the current account continued to grow in the first two months after the lower
credit rating, as the slowdown in imports lagged the severe drop in exports – putting
even more pressure on the financing of the deficit through financial flows .

(i) either the deficit on the current account will have to shrink, or

(ii) the reserves on the official reserves account will decrease. This would be detrimental for
the overall economy.
by Diamond (39.7k points)

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