Harvard Case - Samoa Tala
"Samoa Tala" Harvard business case study is written by Joshua D Coval, Bhagwan Chowdhry, Konark Saxena. It deals with the challenges in the field of Finance. The case study is 20 page(s) long and it was first published on : Sep 24, 2008
At Fern Fort University, we recommend that the Government of Samoa (GOS) implement a comprehensive strategy to strengthen the Tala's stability and foster economic growth. This strategy should focus on a combination of financial policy adjustments, structural reforms, and international cooperation.
2. Background
The case study examines the challenges faced by the Samoan Tala, the national currency of Samoa, in the face of economic volatility and external pressures. The GOS has been grappling with a weakening Tala, driven by factors such as the global financial crisis, the COVID-19 pandemic, and the increasing popularity of the US dollar.
The main protagonists in the case are:
- The Government of Samoa (GOS): Responsible for managing the economy, maintaining currency stability, and promoting economic growth.
- The Central Bank of Samoa (CBS): Responsible for monetary policy, managing the foreign exchange reserves, and overseeing the banking sector.
- The Samoan people: The ultimate beneficiaries of a stable currency and a thriving economy.
3. Analysis of the Case Study
The case study highlights several key issues:
Financial Analysis:
- Weakening Tala: The Tala has depreciated significantly against the US dollar, impacting import costs, inflation, and the purchasing power of Samoans.
- Low Foreign Exchange Reserves: The CBS's reserves have been declining, limiting its ability to intervene in the currency market and maintain stability.
- High Public Debt: The GOS's debt levels have been rising, increasing the risk of a sovereign debt crisis and further weakening the Tala.
Strategic Analysis:
- Limited Economic Diversification: Samoa's economy is heavily reliant on tourism and remittances, making it vulnerable to external shocks.
- Lack of Investment: The country faces a shortage of investment capital, hindering economic growth and job creation.
- Weak Financial Sector: The banking sector is underdeveloped, limiting access to credit and financial services for businesses and individuals.
International Finance:
- Global Economic Uncertainty: The global economic environment remains volatile, posing risks to the Samoan economy.
- Competition from Regional Currencies: The growing popularity of the US dollar in the region poses a challenge to the Tala's dominance.
Applying Frameworks:
- SWOT Analysis: This framework can be applied to assess the strengths, weaknesses, opportunities, and threats facing the Samoan economy and the Tala.
- Porter's Five Forces: This framework can be used to analyze the competitive landscape for the Samoan economy and identify potential threats from regional competitors.
4. Recommendations
Short-Term:
- Increase Foreign Exchange Reserves: The CBS should actively intervene in the currency market to buy Tala and increase reserves. This can be achieved through borrowing from international financial institutions, attracting foreign investment, and promoting exports.
- Tighten Monetary Policy: The CBS should raise interest rates to curb inflation and attract foreign capital inflows.
- Reduce Government Spending: The GOS should implement austerity measures to reduce the budget deficit and control public debt.
Medium-Term:
- Promote Economic Diversification: The GOS should encourage investment in new sectors, such as agriculture, manufacturing, and renewable energy, to reduce reliance on tourism and remittances.
- Develop the Financial Sector: The GOS should strengthen the banking sector by promoting financial inclusion, improving access to credit, and developing a robust regulatory framework.
- Improve Infrastructure: Investing in infrastructure, such as transportation, energy, and telecommunications, will attract foreign investment and support economic growth.
Long-Term:
- Adopt a Flexible Exchange Rate Regime: The GOS should consider moving towards a more flexible exchange rate regime, allowing the Tala to adjust to market forces and reducing the need for frequent interventions by the CBS.
- Strengthen Regional Integration: The GOS should strengthen its economic ties with neighboring countries through trade agreements, regional investment initiatives, and joint projects.
- Promote Sustainable Development: The GOS should prioritize environmental sustainability, climate change mitigation, and responsible resource management to create a more resilient and attractive economy.
5. Basis of Recommendations
These recommendations consider:
- Core Competencies and Consistency with Mission: They align with the GOS's mission to promote economic growth, maintain currency stability, and improve the well-being of the Samoan people.
- External Customers and Internal Clients: The recommendations address the needs of businesses, investors, and the general public by promoting a stable currency, attracting investment, and creating jobs.
- Competitors: The recommendations aim to enhance Samoa's competitiveness in the region by promoting economic diversification, improving infrastructure, and strengthening regional integration.
- Attractiveness ' Quantitative Measures: The recommendations are expected to improve key economic indicators, such as GDP growth, inflation, and foreign exchange reserves.
Assumptions:
- The GOS is committed to implementing the recommended policies.
- The global economic environment will stabilize in the medium to long term.
- The Samoan people will support the necessary reforms.
6. Conclusion
By implementing a comprehensive strategy that combines financial policy adjustments, structural reforms, and international cooperation, the GOS can strengthen the Tala's stability, foster economic growth, and improve the lives of the Samoan people.
7. Discussion
Alternatives:
- Adopting a fixed exchange rate regime: This would provide currency stability but could limit the GOS's ability to respond to economic shocks.
- Introducing capital controls: This could help manage the flow of foreign capital but could also discourage investment and distort the economy.
Risks:
- Political instability: Political instability could undermine the implementation of reforms and create uncertainty for investors.
- Global economic downturn: A global economic downturn could impact the Samoan economy and weaken the Tala.
- Resistance to reform: There may be resistance to some of the recommended reforms from certain groups within society.
Key Assumptions:
- The GOS is committed to implementing the recommended policies.
- The global economic environment will stabilize in the medium to long term.
- The Samoan people will support the necessary reforms.
8. Next Steps
Timeline:
- Year 1: Implement short-term measures to stabilize the Tala and reduce the budget deficit.
- Year 2-5: Implement medium-term reforms to promote economic diversification, develop the financial sector, and improve infrastructure.
- Year 5 onwards: Implement long-term strategies to adopt a flexible exchange rate regime, strengthen regional integration, and promote sustainable development.
Key Milestones:
- Increase foreign exchange reserves by 10% within the next year.
- Reduce the budget deficit by 2% within the next two years.
- Attract $100 million in foreign investment within the next three years.
- Increase the number of businesses accessing credit by 15% within the next five years.
By taking these steps, the GOS can create a more stable and prosperous future for Samoa.
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Case Description
This case examines currency risks faced by Microfinance Institutions, and evaluates strategies to hedge them in countries with pegged currency regimes and no derivatives markets. An MFI based in Western Samoa borrows in different currencies like the US dollar and the New Zealand dollar is worried about the additional variability in its cash flows due to unexpected currency fluctuations, and wants to explore strategies to hedge this risk in the absence of a derivatives market for the Samoan Tala. It seems to the president of the company that borrowing in different currencies, in proportions equal to the weights of the currencies in the basket peg, would reduce the currency risk. He wants to estimate the exact weights of the currencies in the basket peg and measure the reduction of currency risk using this strategy.
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