The Consequences of Policy Uncertainty: Disconnects and Dilutions in the South African Real Effective Exchange Rate-Export Relationship

Abstract

In recent years, the link between the real effective exchange rate (REER) and exports in South Africa has weakened. While exports still rise in response to REER depreciations, the REER-export elasticity is below historical estimates. The literature has put forward a number of possible explanations, from multinational supply-chains to muted exchange rate passthrough. This research explores the role of policy uncertainty in reducing the responsiveness of exports to relative price changes. We construct a novel "news chatter" measure of policy uncertainty and examine how it, paired with other supply-side constraints, can improve our understanding of export performance. We find that increased policy uncertainty diminishes the responsiveness of exports to the REER and has short and long-run level effects on export performance. Finally, we show that a measure of competitiveness that adjusts for uncertainty and supply-side constraints greatly outperforms the REER in tracking exports performance.

The role of economic uncertainty in forecasting exchange rate returns and realized volatility: Evidence from quantile predictive regressions

“…While there exists no clear-cut consensus in terms of which approach to use in constructing measures of uncertainty, the news-based measures of uncertainty, as developed by Baker et al (2016), seem to have gained tremendous popularity in various applications in macroeconomics and finance. For South Africa, the data are obtained from the news-based approach of Hlatshwayo and Saxegaard (2016), who follow the framework of Baker et al (2016), and is available for download from https://sites.google.com/site/ sandile1984hlatshwayo/miscellaneous-stuff. More importantly, the use of this method does not require any complicated estimation of a model to generate it in the first place.…”

“…The data are available for download for all countries barring South Africa from http://www.policyuncertainty.com. For South Africa, the data are obtained from the news-based approach of Hlatshwayo and Saxegaard (2016), who follow the framework of Baker et al (2016), and is available for download from https://sites.google.com/site/ sandile1984hlatshwayo/miscellaneous-stuff. Since the exchange rate is a relative price, in our paper we work with differentials between the natural logarithmic values of the EPU, of a specific country or region, and the natural logarithmic values of the EPU of the USA.…”

Macroeconomic Uncertainty in South Africa

“…Hlatshwayo and Saxegaard (), following Baker and Bloom () and Redl (), produce an economic uncertainty index for South Africa using a count of news stories about uncertainty and show that high levels of uncertainty have contributed to a decline in the response of exports to exchange rate movements. Mavee et al .…”

Exchange rates and firm export performance in South Africa

“…Recently, concerns have been raised that exchange rate depreciations have become less effective in driving export responses, leading to a disconnect or dilution of the exchange rate-export relationship (Leigh et al 2017). These concerns hold in South Africa as well (Anand et al 2016;Hlatshwayo and Saxegaard 2016), most notably in the delayed response of exports to the large and sustained real depreciation of the ZAR over the period 2011 to 2016 ( Figure 1). South Africa experienced one of the largest real depreciations globally over this period (34 per cent), but real aggregate exports increased by a mediocre 6.5 per cent (although real manufacturing exports grew by 22 per cent).…”

“…One area requiring attention is how exporters and importers are affected by changes in the exchange rate. The real exchange rate (RER) has historically been an important factor in driving growth of South African exports and imports (Anand et al 2016;Edwards and Garlick 2014;Edwards and Lawrence 2008;Hlatshwayo and Saxegaard 2016;Parsley 2012). However, the link between changes in the real effective exchange rate (REER) and export responses appears to have weakened in recent years, as reflected in a delayed export response to the substantial real depreciation of the South African rand (ZAR) from 2010 to 2016 (Hlatshwayo and Saxegaard 2016).…”