Student no.

241383 Master of Business Administration (NQF Level

241383-1469348-S 9)
Global Trade (Macro-economics - BRICS -
Developing Markets)
Submission due date: 30 Nov 2022
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Internal use only

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Contents
Introduction................................................................................................................................................................................................3
Hypothesis:............................................................................................................................................................................................4
How do we measure economic performance? Examining literature................................................................................................4
1. Economic Growth:.......................................................................................................................................................................5
2. Price Stability:..............................................................................................................................................................................5
3. Employment:................................................................................................................................................................................6
4. Balance of payments stability....................................................................................................................................................6
5. Distribution of income.................................................................................................................................................................7
6. Economic Development.............................................................................................................................................................7
Effect on the Financial Services Industry.............................................................................................................................................7
1. Contribution of Insurance to South African GDP:..................................................................................................................9
2. Vulnerability in supply chains highlighted for claims – delays in providing services and goods..................................10
3. Effect on increase of premiums for customers:....................................................................................................................10
4. Unemployment:..........................................................................................................................................................................11
5. Green economy.........................................................................................................................................................................11
Conclusion:..............................................................................................................................................................................................12
References..............................................................................................................................................................................................14

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Introduction
On 24 February 2022, Russia invaded Ukraine. As of November 27, 2022, there were 6655 civilians
killed in the war. (Statista, 2022). As a result of the war, many of Ukrainians fled to the west of their
homeland and abroad, creating a humanitarian disaster.

It is the writer’s opinion that the war will have three distinct consequences on the economy: Higher oil
and fuel values will boost inflation, which will erode disposable income and weaken buyer demand.
Trade disturbances and the impacts of sanctions will weigh on exports and imports.

The writer of this paper has an interest in the impact that the war has had on the Financial Services
Industry, a vital contributor to economic performance and growth. The reader will be taken through
the definitions and important concepts of macroeconomic performance. They will then read about the
microeconomic indicators specific to the insurance industry, and how they are interweaved with these
concepts.

There may be a question as to why a choice has been made to examine the financial services
industry and if there is any link at all to the insurance industry and the war in Ukraine. Bearing in mind
that financial services is the foremost sector of the economy – contributing around 20% of the GDP
each year (FSCA, 2022) – it would be remiss to ignore the effect that any performance changes
would have on the economy.

The writer believes that macroeconomics and microeconomics are interconnected and mutually
supportive. For instance, an increase in inflation (a macroeconomic effect) may increase the price of
raw materials used for companies to create items, which in turn will affect the price offered to
customers for the end product. Both macroeconomics and microeconomics examine the same
economic features, but from distinct perspectives: when examining the components of output in a
national economy, we must also comprehend the demand of individual households and enterprises,
which are microeconomic notions. Similarly, we cannot evaluate the risk management policies of
enterprises (a microeconomic concept) without taking into account the impact of macroeconomic
trends in economic development. Therefore, insurance roleplayers must have a firm grasp of
economic ideas and maintain a constant awareness of the economic consequences influencing their
unique clientele.

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Just as the economy is influenced by numerous economic and social factors, so too is the insurance
business. An increase in inflation, for instance, will impact the cost of claims to insurance companies
and, in turn, consumer prices. Similarly, an increase in unemployment, crime, and other negative
macroeconomic factors will have an effect on the insurance business as a whole, and it will also lead
to an increase in pricing for consumers in the microeconomic environment. This could have a
detrimental effect on the economy if insurance plans are cancelled as a result.

There are admittedly other sectors of the economy that are benefiting from the economic effects of
the war, as they are suppliers of commodities that have seen an increase in pricing, which are then
exported to foreign countries, and attract increased income and GDP. This will not be addressed in
this paper.

Hypothesis:
The war in Ukraine has influenced the economic performance of South Africa. This affects the
Financial Services Industry as a microeconomy.

Objective 1: Research the factors influencing overall economic performance through literature
Objective 2: Analyze the microeconomic effects on the Financial Services Industry
Objective 3: Provide recommendations for a sustainable future and conclude if hypothesis is correct.

How do we measure economic performance? Examining literature

The indicators that will be used in this report are taken from Milpark, 2022 and given as a guideline
for these measures. We will not make use of all indicators.

Indicators are shown in Figure 1.1 below:

Figure 1.1: Economic Performance

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 (Milpark, 2022)

1. Economic Growth:
Economic growth is the rise in the quantity and quality of economic goods and services
produced and consumed by a society. (Roser, 2022)
The war poses huge dangers to the global economy, which was projected to expand by 4.1%
and 3.2%, respectively, in 2022 and 2023. If commodities prices and financial markets
continue to fluctuate as they have since the start of the war, global GDP growth might be
reduced by more than 1 percent this year, and global consumer price inflation could increase
by nearly 2.5 percent. For growing nations, the war, and the expanding of oil prices since
September 2021 was anticipated to reduce growth by around 1 percentage point in 2022 and
2023, to 4.6% and 4.5%, respectively. For Sub-Saharan Africa (SSA) nations that had not yet
fully recovered from the COVID-19 pandemic recession, the Ukraine war will delay their return
to their growth route prior to the crisis. Higher food and power prices are the greatest current
source of danger for SSA nations, and this will have a bigger negative effect on poorer
nations.
The Ukraine-Russia conflict has introduced a new, multidimensional threat to the South
African economy, economic outlook, and monetary policymaking. Through increasing
electricity and food prices, the war exacerbates supply chain bottlenecks and inflationary
pressures, resulting in a more rapid tightening of monetary policy. Rising price pressures and
interest rates will have a damaging impact on discretionary income, consumer spending,
economic expansion, employment, poverty, and food security. (UNDP, 2022).

2. Price Stability:

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 Avoiding extended periods of overly high inflation or deflation is what is meant by price
stability.
Inflation is a continuous rise in the general price level of goods and services in an economy,
resulting in a decline in the buying power and value of money. Extremely high inflation is
detrimental for multiple reasons, including the fact that it makes it more difficult to make
economic decisions, hinders economic progress, and devalues savings. Even if the price of
what they produce is declining, employers frequently find it difficult to reduce salaries. This
results in an increase in unemployment and bankruptcies. (Anon, 2012).

3. Employment:
In South Africa, the unemployment rate is determined by a census or an interview.
"Unemployed individuals are members of the economically engaged population," according to
Stats SA, 2022, who:

(a) didn't work the week before the interview.

(b) intend to work and are willing to begin within one week of interview, and

c) actively sought employment or begun self-employment in the four weeks prior the interview.

The formal unemployment rate, as defined above, is the percentage of the economically
committed population that is unemployed.

Poverty, according to research results, leads to crime.

Unemployment affects property crime more than violent crime. The vast majority of property
criminals are out of work. (2022, IvyPanda).

4. Balance of payments stability

The balance of payments (BOP), also accepted as the balance of international payments, is a
register of all transactions that take place between a country and the rest of the world over a
specified time period. It is a summary of all transactions between individuals, businesses, and
government agencies in one country and individuals, businesses, and government entities in
another country. (Anon, 2022).

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 5. Distribution of income
The Lorenz curve is a graphical representation of the income or wealth distribution in
economics. It was designed by Max O. Lorenz in 1905 to illustrate wealth distribution
inequality.

The curve is a graph depicting the proportion of total income or wealth assumed by the bottom
percentile of a population. It is frequently used to illustrate income distribution, indicating what
percentage of the total income the poorest percent of families have. It can also be used to
illustrate asset allocation. Many economists consider it a measure of socioeconomic inequality
when employed in this manner. (Lorenz, 1905).

The writer believes that another factor to consider would be the male/female employment rate
in South Africa, which leads to how income is distributed. This is supported by literature. The
Global Gender Gap Report 2022 indicates that gender parity is not improving. As global crises
intensify, it is women who suffer the most, exacerbating the already dismal labour market
outcomes for women. (World Economic Forum, 2022)

6. Economic Development
Statistics South Africa has revealed new statistics indicating that, with the exception of motor
vehicle theft, home offences have increased in the twelve months preceding the interview
compared to 2020/21. Individual crime experiences have likewise risen, with the exception of
street robberies, which decreased in 2021/22. According to the Governance, Public Safety,
and Justice Survey (GPSJS) 2021/22, the proportion of 16-and-older persons who felt
comfortable walking alone in their communities during the day worsened from 84.8 percent in
2020/21 to 81.3 percent in 2021/22. (Stats SA, 2022).

Housebreaking is the most prevalent type of property crime in South Africa.

Effect on the Financial Services Industry

Before we analyze the effect of the war on the financial services sector in particular, it is important to
note the distinction between macro- and micro- economics. This is shown below in Table 1.1:

Table 1.1 Difference between Micro- and Macro- economics.

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 Microeconomics Macroeconomics

Deals with decisions and policies about specific Deals with the medians and sums of a full
economic variables like supply, demand, price. economy, including national income, aggregate
output, and aggregate savings.

Is limited in extent and interprets lesser A broad evaluation that assesses the economy
economic components. of a nation.

Also called 'price theory' as it explains the Because it explains the shifting levels of
practice of allocating economic means based on national income in an economy over time, this
the relative pricing of goods and services. idea is also known as "income theory."

Deals with the flows of varied production Considers the circular flow of income and
elements from single resource owners to single expenditures between economic areas.
resource users.

Assists in the creation of policies for the Assists in the creation of policies for the
equitable sharing of resources at the transaction equitable sharing of economic resources; for
level, such as the setting of the maximum price. instance, inflation and unemployment.

Source: Adapted from Schwind (2007)

As the comparison shows, there is a direct link to the macroeconomic performance of South Africa on
the Financial Services industry.

These are summarized in Table 1.2 below, which takes economic performance and shows what it
means for the Industry:

Table 1.2: Economic Indicator comparison 2021 vs 2022 and microeconomic effect on insurance:
Indicator Comment on changes Microeconomic effect on insurance
GDP Q2:2022 showed a decrease of -0.7% from Lower contribution to the income of South
Q1:2022. Africa. Government may react by increasing
VAT and Income tax to boost revenue.
Negative effect for policyholders and
employees, as they will have less disposable
income.
Unemployment Decrease of 1.2% Q2:2022 to Q3:2022. Less people are employed, leading to
Basic salary/wages increased by 1.5% lessening of clients who can purchase
insurance. Wages only increase by 1.5%,
which is significantly lower than the CPI of
7.6%. Pressure to cancel policies or lower
rates.
Industries employing less workers slow down
on production, lessening demand for some
classes of insurance. Retrenchments in the

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 insurance sector.
Inflation (CPI) CPI 7.6% October 2022, up from 7.5% in Less money to spend on “nice to haves” as te
September 2022. price of basic goods and services is increasing
7.8% 13-year high in July 2022. at 5 times the wage increase rate.
Crime Increased to 59.2% in 2022 from 59.2% in 2021 More crime leads to more claims. Insurance
company pays more out in claims, needs to
recover losses.
Labour Force – Women in 2022: 47% unemployment Less economically active women, leading to
Distribution of Men in 2022: lowered independence financially. Some
Income 35.6% unemployment insurance companies model their pricing
around gender of their customers, with
assumptions about risk behaviour.
Sources: Stats SA (2022) ; Own (2022)

1. Contribution of Insurance to South African GDP:

The outlook or forecast for insurance company profits is highly associated with the country's gross
domestic product (Still and Stokes, 2018:75).

Insurance is also a method for mitigating economic risk. It gives protection to both huge corporations
and smaller businesses, allowing them to pursue possibilities with the assurance that their losses
would be covered. Therefore, insurance enables the pooling of risk and the development of economic
value.

Credit is a method for raising total expenditure in the economy, hence improving the income of
individuals and businesses. The procedure raises the total GDP and facilitates greater levels of
productivity. This credit is produced when banks lend to businesses and consumers using depositors'
funds as collateral. Due to the fact that not all depositors withdraw their monies simultaneously,
banks can lend more money into the economy than they have in deposits, hence increasing the
amount of accessible money in the economy.

Insurance firms play a significant role in the loan creation decisions of banks. By providing potential
lenders with guarantees by insuring their assets, the risk profiles of creditors improve, making them
more satisfactory to banks as possible creditors. As a result of the reduced risk premium, banks are
able to offer credit at cheaper interest rates, so benefiting the economy as a whole.

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The South African insurance business recognises the need to foster regional economic development.
The involvement of the insurance industry can improve the insurability and sustainability of significant
infrastructure expansion projects, which will boost all sectors of the economy.

Unfortunately, when there is less money for consumers to spend, insurance is unable to provide a
consistent or increased contribution to GDP growth and development.

2. Vulnerability in supply chains highlighted for claims – delays in providing services and goods.

Due to the conflict in Ukraine and the shipping delays that followed in the wake of the COVID-19
epidemic, supply chains have been disrupted for businesses throughout the globe.

These issues have hastened a rethinking of global sourcing. The past three decades have been
characterised by hyperglobalization, as corporations have favoured low-cost offshore production in
low-wage countries such as China.

The situation in Ukraine has underscored the significance of bolstering the resilience of supply
systems. The demand for these services starts to be increased and supply cannot keep up. This
drives the price for the items higher.

For the insurance sector specifically, if there is a delay in the receipt of parts to fix vehicles, or for
repairers – storage costs increase. If the customer is without a vehicle, they will be influenced directly
by higher transport costs as they will need to make use of a replacement.

3. Effect on increase of premiums for customers:

Insurance companies make use of many financial metrics to decide their premiums. These fall
outside of the scope of this report.
One very basic formula that the writer has encountered is the “Loss ratio” methodology. This is a
simple ratio determined by the total cost of claims as a percentage of the annual premiums paid. Any
loss ratio that is over a percentage (as determined by each Underwriter) will be flagged for
investigation and likely be subjected to a premium increase.

The total cost of claims is also affected by labour costs for repairs, parts costs, storage costs and any
other cost that is related to indemnifying the customer.

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From this explanation, any delay in the claims value chain will result in a higher total cost of claims. It
would then follow that insurance companies would be compelled to increase their premiums to
recoup their losses.

4. Unemployment:
Social responses often incorporate increased crime rates, resulting in high claims for insurers and
higher loss ratios.
The more citizens who find themselves unemployed, the most likely it is for crimes to occur.

This increase in crimes will lead to an increase in the number of claimants, resulting in decreased
profits for insurance companies.

5. Green economy

COP27 concluded at the time of writing this report, 29 November 2022.

2015's COP21 in Paris represented a negotiation breakthrough when most of the world's nations
agreed to a climate change pact, including South Africa.

The Paris accord is a voluntary agreement. Each nation establishes a reduction goal for its
greenhouse gas emissions - a nationally set contribution (NDC). It is essential to remember that this
objective is set by the nation itself. It is not imposed externally.

The South African government established the country's contribution in 2021 at 350 million to 375
million tonnes of carbon equivalent by 2030, in accordance with the 1.5 °C limit on climate change.
Our current emissions are approximately 450 million tonnes, so this aim requires a 17% reduction in
emissions.

South Africa is the thirteenth largest emitter worldwide. Compared to the global average of 172
million tonnes per country, we produce 450 million tonnes. Compared to the global average of 4,8
tonnes per capita, we emit roughly 7,5 tonnes per person. Per capita, we are the fifteenth largest
country in the world. Regardless of the metric, we are a significant emitter. (Landman, 2022)

Climate change and global warming are producing extreme weather conditions including flooding.
Storms and cyclones are becoming increasingly frequent. This has resulted in an increase in
customer claims for damage to their vehicles, residences, and valuables.

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The incentive of contributing to a cleaner, greener economy can be seen from a financial standpoint
to the financial services industry. If carbon emissions are controlled, there will be less natural
disasters, therefore less claims.

Conclusion:
The introduction outlined what the research objectives were. We were introduced to the hypothesis of
the paper, and the background to the war in Ukraine.
The literature was examined, along with analysis of how the financial services industry is performing.

The impact of the Ukraine-Russia war remains highly unknown, with much depending on its duration,
its outcome, and the worldwide sanctions, currency wars, boycotts, and responses to it.

Nevertheless, a large inflationary effect on the South African economy appears probable, which
increases the risk to economic growth, poverty, unemployment, food security, social stability, and
short- and long-term interest rates. This then affects the financial services industry as a key part of
the South African economy.

The comparison data that was used does have different timeframes examined, a better picture is
anticipated by the writer by the time that the Minister of Finance has his next Budget Speech in 2023.

Recommendations based on the research, point to the following measures that can be taken to
lessen the blow to the economy:

- Develop a culture of inclusivity, for women specifically. The insurance industry must look for
opportunities to uplift small businesses run by women, even in these tough economic times.
This leads to an increase in economic dependence and an increase in employment. From
there, an increase in GDP can be expected by more revenue being generated from income
tax, or company tax.
- Promoting a green economy will result in less natural disasters and therefore less claims over
the long term. Less claims mean more income and more contribution to GDP and keeping
employment available, as companies can expand with more money.
- Efforts to stabilize supply chains can be explored. One suggested avenue is forming local
strategic partnerships, to boost the local economy and assist with less external factors
influencing service levels.

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In conclusion, I remind the reader of the objectives of this paper and whether they were achieved or
not:

Objective 1: Research the factors influencing overall economic performance through literature
Achieved.
Objective 2: Analyze the microeconomic effects on the Financial Services Industry
Achieved.
Objective 3: Provide recommendations for a sustainable future and conclude if hypothesis is correct.
Achieved.

As we can see, through the objectives of the paper being reached, the hypothesis that the war in
Ukraine has influenced the economic performance of South Africa is true. This does indeed affect the
Financial Services Industry as a microeconomy.

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References

Anon. 2012. Importance of price stability. Eesti Pank. [Online] Available at:
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2022]

Anon, 2022. Balance of Payments in Global Transactions: Why Does It Matter? 2022. Investopedia.
[Online] Available at: https://www.investopedia.com/terms/b/bop.asp [Accessed 16 November 2022].

FSCA, 2022.Financial Sector Study [Online] Available at: https://www.fsca.co.za/Documents/FSCA

%20Financial%20Sector%20Outlook%20Study%202022.pdf [Accessed 15 November 2022]

IvyPanda. (2022) 'Unemployment Leads to Crime Essay'. [Online] Available at: https://ivypanda.com
[Accessed: 30 November 2022].

Kammer et.al, A. 2022. How War in Ukraine Is Reverberating Across World’s Regions. IMF. [Online]
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Landman, J. 2022. JP Landman | What COP27 means for SA and Eskom | [Online] Available at:
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[Accessed: 30 November 2022].

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Statista. 2022. Topic: Russia-Ukraine war 2022. [Online] Available at:
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