Balance of Payment

composition of South
Africa

2/2/2014

Balance of Payment
composition of South
Africa
Submitted To:
Dr. M. Masud Rahman
Professor
Department of Finance
University of Dhaka

Submitted By: Group#

Sl. No

01.
02.
03.
04.

Name

ID-MBA

151515-

Date of submission: February 2, 2014

ID-BBA

February 02, 2012

Dr. M. Masud Rahman
Professor
Department of Finance
University of Dhaka
Dhaka -1000

Subject: Submission of the report on Balance of Payment composition of

South Africa.
Sir,

We are the students of MBA program of the Department of Finance of University

of Dhaka. We have the pleasure to submit the report on Balance of Payment
composition of South Africa.
You would be glad to hear that we have given our best efforts to prepare the report
with relevant information that we have collected from different relevant sources
during my analysis. We have the immense pleasure to have the opportunity to
study on BOP Composition. It is worthwhile to mention that the knowledge we
have gathered during the analysis will help us in practical field.
For your kind consideration and perusal we would like to mention that there might
be some mistakes due to limitations of our knowledge, wisdom and time
constraint. In spite of various shortcomings we have tried to cover all relevant
affairs. We are confident that our report will be able to meet up our expectation
and you will appreciate our endeavor and find the report emphatic.

Sincerely yours,

On behalf of group BBA 15th Batch

Department of Finance
University of Dhaka.

Acknowledgement

We acknowledge our heartiest gratefulness to all who have extended their hand of
cooperation in preparing this report. At first we express our gratitude and
acknowledge my indebtedness to our honorable course teacher Dr. M. Masud
Rahman for his overall cooperation, giddiness, advice and support in discharging
our responsibility consciously and preparing this report.
Finally we greatly appreciate the cooperation and help we have from my fellow
students and others.

Executive Summary
The economy of South Africa is the largest in Africa, accounts for 24% of its gross domestic
product in terms of purchasing power parity, and is ranked as an upper-middle income economy
by the World Bank; this makes the country one of only four countries in Africa in this category
(the others being Botswana, Gabon and Mauritius). Since 1996, at the end of over twelve years
of international sanctions, South Africa's Gross Domestic Product has since almost tripled to
$400 billion, and foreign exchange reserves have increased from $3 billion to nearly $50 billion;
creating

growing

and

sizable

African

middle

class,

within

two

decades

of

establishing democracy.
According to official estimates, a quarter of the population is unemployed, According to a 2013
Goldman Sachs report, that number increases to 35% when including people who have given up
looking for work.[9] A quarter of South Africans live on less than US $1.25 a day.
We have estimated an aggregate import demand function for South Africa during 1961-2012
using the bounds testing approach to cointegration. Our results suggest that a unique
cointegration relationship between imports and its regressors, namely, relative prices, exchange
reserves, and income, exists. This unique relationship enabled us to study the

long-run

elasticities of South Africas import demand function. These results indicate that real foreign
reserves are positive and significant in long-runs and are consistent with other findings.
However, clear differences exist in the relative prices coefficient in the long-run, the coefficient
is highly elastic and not statistically significant, which contradicts other studies. In the long-run
increasingly defensive apartheid strategies over time led to greater inflexibility in the market for
imports to changes in foreign reserves.
The study employed two dummy variables to capture the impact of apartheid and international
sanctions on import demand. Our results doesnt contradict historical explanations: The
coefficient for D1 is positive but insignificant in the long-run, meaning that apartheid has only
had a short-run impact South Africas import demand function. In the long-run, import
substitution policies failed because of the economys reliance on intermediate and capital goods
imports. The coefficient for D2 is positive and significant at the long-run when the coefficient is
negative.
function.

Therefore, in the long-run, it negatively affected South Africas import demand

This study is the first of its kind to incorporate an analysis of apartheid and international
sanctions on South Africas import demand function. Since the economy has been characterized
by exchange rate volatility, which has affected its trade structure, future studies could include
this variable as a fourth regressor to capture its effect on import demand, allowing for results that
are more robust.
From a policy perspective, South Africa clearly must focus on monetary and fiscal policies that
would reduce its imports of capital and intermediate goods, especially oil, while simultaneously
focusing on diversifying its export base. Strengthening trade relations with other developing
countries will also give it a foreign exchange rate advantage, thereby increasing its foreign
reserves, and in turn, its balance of payments. To complement trade policies, domestic private
investment must be targeted in labor-intensive industries. All these changes will ultimately
contribute to a more stable exchange rate, greater macroeconomic stability, growth, and with
that, an improvement of unemployment and poverty problems that characterize South Africas
economy.

Contents
1.1INTRODUCTION TO THE REPORT ..................................................... Error! Bookmark not defined.
1.2 Methodology ............................................................................................ Error! Bookmark not defined.
1.3 Limitations ............................................................................................... Error! Bookmark not defined.
2. Economic history of Brazil ........................................................................ Error! Bookmark not defined.
2.1 Colonial period......................................................................................... Error! Bookmark not defined.
2.2 Sugar cycle, 1540-1640 ........................................................................... Error! Bookmark not defined.
2.3 Eighteenth-century gold rush ................................................................... Error! Bookmark not defined.
2.4 The economy at independence, 1822 ....................................................... Error! Bookmark not defined.
2.5 U.S and Brazil Economic Relations, 1870-1930 ..................................... Error! Bookmark not defined.
2.6 Coffee economy, 1840-1930 .................................................................... Error! Bookmark not defined.
2.7 Sweeping changes, 1930-45 ..................................................................... Error! Bookmark not defined.
2.8 Import-substitution industrialization, 1945-64......................................... Error! Bookmark not defined.
2.9 Stagnation and spectacular growth, 1962-80 ........................................... Error! Bookmark not defined.
Stagnation, 1962-67 ....................................................................................... Error! Bookmark not defined.
Spectacular growth, 1968-73 ......................................................................... Error! Bookmark not defined.
2.10 Growth with debt, 1974-80 .................................................................... Error! Bookmark not defined.
2.11 Stagnation, inflation, and crisis, 1981-93............................................... Error! Bookmark not defined.
2.12 1981-84 period ....................................................................................... Error! Bookmark not defined.
2.13 1985-89 period ....................................................................................... Error! Bookmark not defined.
2.14 1990-93 period ....................................................................................... Error! Bookmark not defined.
2.15 1994-present (Post "Real Plan" economy) ............................................ Error! Bookmark not defined.
2.16 Brazils Pegged Currency: ..................................................................... Error! Bookmark not defined.
2.17 Relationship of Brazil & USA currency (Pegged):- .............................. Error! Bookmark not defined.
3.1 Impact of Current and Capital Account: .................................................. Error! Bookmark not defined.
3.1.1 Current Account: ................................................................................... Error! Bookmark not defined.
3.1.2 Capital Account: ................................................................................... Error! Bookmark not defined.
Financial account: Total of financial account: ........................................... Error! Bookmark not defined.
Direct Investment ........................................................................................... Error! Bookmark not defined.
3.2 CURRENT ACCOUNT BALANCE (BOP; US DOLLAR) IN BRAZIL................ Error! Bookmark not defined.
3.3 NET CAPITAL ACCOUNT (BOP; US DOLLAR) IN BRAZIL........................... Error! Bookmark not defined.
3.4 Strength & Weaknesses of Brazil: ........................................................... Error! Bookmark not defined.

3.5 Trade deficit ............................................................................................. Error! Bookmark not defined.

4.Brazil's Top Trade Partners in 2010............................................................ Error! Bookmark not defined.
4.1 Top 10 Trade Partners for Brazilian Exports ........................................... Error! Bookmark not defined.
4.2 Top 10 Trade Partners Supplying Imports to Brazil ................................ Error! Bookmark not defined.
4.3

Brazil and US trade ............................................................................ Error! Bookmark not defined.

4.3.1 Brazil Exports to U.S. ........................................................................... Error! Bookmark not defined.

4.3.2 Fastest-Growing Exports from Brazil ................................................... Error! Bookmark not defined.
Fastest-Growing Exports to USA from Brazil in 2010 .................................. Error! Bookmark not defined.
4.3.3 Top Brazilian Imports from U.S. .......................................................... Error! Bookmark not defined.
4.3.4 Fastest-Growing Brazilian Imports from America ............................... Error! Bookmark not defined.
4.5 Brazil BOT (January 2006 to June 2012) ............................................... Error! Bookmark not defined.
4.6 Brazil current account .............................................................................. Error! Bookmark not defined.
4.7 Brazil export............................................................................................. Error! Bookmark not defined.
4.8 Brazil import ............................................................................................ Error! Bookmark not defined.
4.9 Brazil and Bangladesh ............................................................................. Error! Bookmark not defined.
4.10 Bangladeshs Export to Brazil ............................................................... Error! Bookmark not defined.
4.11 Bangladesh exports almost 120 items of products to Brazil. These are listed below. Error! Bookmark
not defined.
5.1 Impact of Current account, financial account, Investment Income (net) & Current transfer (net) on
Foreign Exchange: ......................................................................................... Error! Bookmark not defined.
5.2 Impact of Export & Import on foreign exchange: .................................... Error! Bookmark not defined.
5.3 Impact of Interest & Inflation rate on foreign exchange: ......................... Error! Bookmark not defined.
6.1 Simulation of Risk Management Strategies: ............................................ Error! Bookmark not defined.
6.2 Brazilian Risk Management Strategy ..................................................... Error! Bookmark not defined.
7.1 IRP: .......................................................................................................... Error! Bookmark not defined.
7.1.1 Assumptions:..................................................................................... Error! Bookmark not defined.
7.1.2 Covered interest rate parity ............................................................... Error! Bookmark not defined.
7.1.3 Graphical Analysis of IRP: ................................................................... Error! Bookmark not defined.
IRP Line: ........................................................................................................ Error! Bookmark not defined.
Points above and below the line:.................................................................... Error! Bookmark not defined.
7.1.4 Analysis of IRP of Brazil: ..................................................................... Error! Bookmark not defined.
7.1.5 Statistical test: ....................................................................................... Error! Bookmark not defined.

7.1.6 R2 test: ................................................................................................... Error! Bookmark not defined.

7.1.7 Significant Test: .................................................................................... Error! Bookmark not defined.
7.1.8 Constructing the IRP line for Brazil: .................................................... Error! Bookmark not defined.
7.1.9 Graphic analysis of IFE for Brazil: ....................................................... Error! Bookmark not defined.
7.2 PPP: ...................................................................................................... Error! Bookmark not defined.
7.2.3 Graphical Analysis of PPP: ................................................................... Error! Bookmark not defined.
7.2.4 PPP line: ................................................................................................ Error! Bookmark not defined.
7.2.5 Points above and below the line:........................................................... Error! Bookmark not defined.
7.2.6Analysis of PPP of Brazil: ..................................................................... Error! Bookmark not defined.
7.2.7 Statistical test: ....................................................................................... Error! Bookmark not defined.
Test for a0 = 0 and a1 = 1: ............................................................................... Error! Bookmark not defined.
7.2.8 R2 test: ................................................................................................... Error! Bookmark not defined.
7.2.9 Significant Test: .................................................................................... Error! Bookmark not defined.
7.2.10 Constructing the PPP line for Brazil: .................................................. Error! Bookmark not defined.
7.2.11 Graphic analysis of PPP for Brazil: ................................................... Error! Bookmark not defined.
7.3 IFE: .......................................................................................................... Error! Bookmark not defined.
7.3.2 Graphical Analysis of IFE: ................................................................... Error! Bookmark not defined.
7.3.3 IFE line: ................................................................................................ Error! Bookmark not defined.
7.3.4 Points above and below the line:........................................................... Error! Bookmark not defined.
7.3.5 Analysis of IFE of Brazil: ..................................................................... Error! Bookmark not defined.
Statistical test: ................................................................................................ Error! Bookmark not defined.
Test for a0 = 0 and a1 = 1: ............................................................................... Error! Bookmark not defined.
7.3.6 R2 test: ................................................................................................... Error! Bookmark not defined.
7.3.7 Significant Test: .................................................................................... Error! Bookmark not defined.
7.3.8 Constructing the IFE line for Brazil:..................................................... Error! Bookmark not defined.
7.3.9 Graphic analysis of IFE for Brazil: ....................................................... Error! Bookmark not defined.
8. PPP and IFE relationship Of Brazil with Bangladesh:............................... Error! Bookmark not defined.
8.1 Analysis of PPP: ....................................................................................... Error! Bookmark not defined.
8.1.2 Statistical test: ....................................................................................... Error! Bookmark not defined.
8.1.3 Test for a0 = 0 and a1 = 1:....................................................................... Error! Bookmark not defined.
8.1.4 R2 test: ................................................................................................... Error! Bookmark not defined.
8.1.5 Significant Test: .................................................................................... Error! Bookmark not defined.

8.1.6 Constructing the PPP line for Bangladesh: ........................................... Error! Bookmark not defined.
8.1.7Graphic analysis of PPP for Bangladesh: ............................................. Error! Bookmark not defined.
8.2IFE Analysis of Bangladesh: ....................................................................... Error! Bookmark not defined.
8.2.1 Statistical test: ....................................................................................... Error! Bookmark not defined.
8.2.2 Test for a0 = 0 and a1 = 1: ...................................................................... Error! Bookmark not defined.
8.2.3 R2 test: ................................................................................................... Error! Bookmark not defined.
8.2.4 Significant Test: .................................................................................... Error! Bookmark not defined.
8.2.5 Constructing the IFE line for Brazil:..................................................... Error! Bookmark not defined.
8.2.6 Graphic analysis of IFE for Brazil: ....................................................... Error! Bookmark not defined.
9. CURRENCY CRISIS ....................................................................................... Error! Bookmark not defined.
9.1 BRAZILS KEY ISSUES ................................................................................. Error! Bookmark not defined.
9.2 INSTITUTION OF CRAWLING PEG SYSTEM ............................................... Error! Bookmark not defined.
9.3DEVALUATION OF THE REAL ..................................................................... Error! Bookmark not defined.
9.4 BALANCE OF PAYMENT CRISIS MODEL AND AA-DD MODEL ................... Error! Bookmark not defined.
9.5 BRAZILS ECONOMIC DATA ...................................................................... Error! Bookmark not defined.
9.6 RECOMMENDATIONS TO PREVENT A CRISIS ........................................... Error! Bookmark not defined.
Conclusion ...................................................................................................... Error! Bookmark not defined.
Bibliography ................................................................................................... Error! Bookmark not defined.