3. Electronic Theses and Dissertations (ETDs) - All submissions
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Item Foreign Direct Investment and the mining sector in South Africa: Implications for the current account balance(2017) Taruvinga, Tariro RoselynThe mining sector contributes to South Africa’s economic growth through tax revenue, employment creation and export revenue. Because of the abundance of the natural resource endowment of mining sector, it attracts FDI in line with the natural resource rents it fetches. However, the sector is subject to countervailing forces that threaten to hamper prospects of a positive economic growth contribution the sector can make. With mining being the largest contributor of export revenue and investment income, there has been a trade balance and net investment income deficit over the past 10 years, due to South Africa importing more value-added goods and repatriating investment income to foreign investors. This raises the question of whether South Africa is attracting the appropriate FDI and encouraging the reinvestment of its export earnings. This study reviews literature on the current account balance and how mining and FDI reflect theories identified in the literature. Government policies and incentives are analysed to evaluate their effectiveness in attracting appropriate kinds of FDI and the nature of their impact on economic growth. From the literature review, we identified a model for mapping the effect of FDI and the mining sector on the current account balance. Specifically, a VECM model is used to find the long-run and short-run effects of the variables considered to explain the impact of FDI inflows and outflows on the current account balance. The first model examined the effects of relationship between FDI and the mining sector on the current account balance. The results showed that mining consumption has a positive relationship with the current account balance, and that FDI has a negative impact on the current account balance. There was, however, no short-run causality between FDI and mining consumption towards the current account. The second model examined the relationship between the current account balance and FDI on GDP. The results show that the current account balance has a positive long-run relationship with GDP, and FDI has a negative impact on GDP. The probabilities yielded in the short run were significant in confirming short-run causality between the current account balance and FDI to GDP. The third model examined the relationship between FDI, mining consumption, exchange rate and commodity price index on GDP. The results show that mining consumption, FDI, commodity prices and real exchanges rate have a negative long-run relationship with GDP. Page | Overall, the results indicate the need for South Africa to encourage value-adding linkages within the mining sector in ways that will significantly shift the current account balance from a deficit to a surplus. Incentives that encourage a reinvestment of income to fund production activities that may come in the form of mergers and acquisition, brownfield investment and green field investments, are critical. The outcome of such guided production activities would result in a decrease in outflow of investment income from the economy. Keywords: Current Account, Foreign Direct Investment, Mining Sector, South AfricaItem The effects of multi bank trading platforms on the foreign exchange market: the case of South Africa(2018) Lebata, BasiaSince the floating of Foreign Exchange rates in the 1970’s, the global foreign exchange market has seen a transformation and evolution led largely by the invention of Electronic Trading. The Foreign Exchange market, which was previously opaque, has now been transformed in a manner that now makes the market cheaper to transact in as well as being more transparent than it was previously. This paper analyses the impact of Foreign Exchange Electronic Trading Platforms, with a focus on Multi Bank Trading Platforms, by companies in South Africa. Though this topic has been written about quite a lot from a global or developed market perspective, not much research has been done on this topic in the South African context. A corporate online survey questionnaire was sent out to more than 200 companies operating in South Africa to generate responses with regards to the respective companies views, opinions and beliefs with regards to Electronic Trading. Similarly, a bank online survey questionnaire was sent to all banks in South Africa who can buy and sell Foreign Exchange to corporates in order to gauge the respective banks’ views, opinions and beliefs with regards to Electronic Trading. The research suggests that Multi Bank Trading Platforms would be a welcome addition to treasury departments of companies operating in South Africa. Though Straight Through Processing is the desired state in using Multi Bank Trading Platforms, usage of the platforms without implementing Straight Through Processing is beneficial as the platforms lead to increased price transparency, better audit trail in terms of checking that FX deals are being concluded at the best possible rate, cost reductions, reductions in process risk and efficiency gains when transacting Foreign Exchange deals. The purported disadvantages of the platforms that they increase volatility, that they negatively affect liquidity and that they are bad for the FX market structure seem to be invalid with a majority of corporates and banks disagreeing with the purported disadvantages. Keywords: Foreign Exchange, Electronic Trading, Multi Bank Trading Platforms, Straight Through Processing.Item The exchange rate as an absorber of commodity price volatility on stock returns of commodity producing firms(2017) Ngwenya, Simosini ChoiceThis paper provides an empirical analysis of the effect of commodity price volatility on the volatility of the South African exchange rate and subsequently the returns on the equity of commodity producing firms listed on the JSE. GARCH and VAR models evaluate South African exchange rate and stock market data between the years 1995 and 2015. Results show that there exists a spill over and bidirectional relationships between the equity returns volatility and the volatility of the exchange rate. Findings also indicated that international commodity price shocks transmitted into the South African Rand.Item Determinants of financial stress in South Africa(2017) Mmusi, Siamisang AnnaWith a globalised system, the credit crunch of 2007/2008 rippled through the global economy quickly and turned a global financial crisis into a global economic crisis, vulnerabilities in the economy surfaced when it hit and these still continue to plague South Africa today. According to the World Bank, South Africa’s real GDP growth estimates are 0.8% in 2016/2017 and 1.1% in 2017/2018. Increasing uncertainty in global financial markets and banking systems, sharp declines in commodity prices, subdued global trade, currency pressure, as well as domestic constraints such as a current account deficit, a negative inflation outlook and high levels of unemployment, lead to increased financial stress in South Africa making the country more vulnerable in the event of an adverse scenario. Clearly, being cognizant of determinants of financial stress in South Africa is of paramount importance to policy makers as it allows them to assess potential risks to financial system stability and to consider timely and appropriate counteractions while maintaining a financial system that is resilient to systemic shocks. (South African Reserve Bank Financial Stability Review, 2016) This study aims to construct a financial stress index using Principal Component Analysis to identify key determinants of financial stress in South Africa. Several variables that have been identified in standing literature as being able to capture certain symptoms of financial strain in emerging market economies are estimated then aggregated into an index using the principal component analysis method. The usefulness of the index in identifying past crises is then assessed, moreover its performance is contrasted against the financial stress index constructed by South African Reserve Bank as well as against a South African composite business cycle leading indicator. Finally, the ability of the index to predict economic activity is examined.Item The relationship between oil prices and the South African Rand/US Dollar exchange rate(2016) Masuku, MelusiIn this study we examine the relationship between international oil prices and the South African Rand/US Dollar exchange rate. We also determine the direction of causality between these two variables. We further ascertain the magnitude of the influence of oil prices to the exchange rate compared to other theoretically driven macroeconomic variables. A forecasting exercise is also undertaken to determine whether oil prices contain information about future Rand/Dollar exchange rate. Drawing from the works of Aliyu (2009) and Jin (2008) we use VAR based cointegration technique and vector error correction model (VECM) for the long run and short run analysis respectively. The results show that there is a unidirectional causality running from oil prices to exchange rate and not the other way round. We also find that a 1% permanent increase in oil prices results in 0.17% appreciation of the Rand against the US Dollar; a 1% permanent increase in money aggregates results in 21.3% depreciation of the Rand and a 1% increase in business cycles results in 0.29% depreciation of the Rand in the long run. A 1% increase in inflation and interest rates is found to result in a 0.09% and 0.005% depreciation on the Rand respectively. Our short run analysis indicates that 4.4% of the Rand/Dollar exchange rate disequilibrium can be corrected within a month. Oil prices are found to contain some information about the future Rand/US Dollar exchange rate when the VAR model is used for forecasting. This study has shown there is a causal relationship between oil prices and the strength of the Rand against the Dollar and, therefore, recommends diversification of the economy and more use of green energy. Strategies to reduce capital flight and trade-related capital is also recommended by this study. Key Words: Exchange rate, Oil price, forecasting, vector autoregressive (VAR) model, cointegration, vector error correction model (VECM), causalityItem Empirical analysis of the dynamics of the South African rand (Post-1994)(2016) May, CyrilThe objective of this thesis is to investigate the recent historical dynamics of the four major nominal bilateral spot foreign exchange rates and the fifteen currency-basket nominal effective exchange rate of the South African rand (hereafter referred to as the rand). The thesis has been organised as three separate studies that add to the advancement of the knowledge of the characteristics and behaviour (causal effects) of the rand. The common thread that holds the individual chapters together is the study of the dynamics of the rand. In particular, the study establishes whether the apparent nonstationarity of the exchange rate is a product of unit root test misspecification (a failure to account for structural change), considers the connexions between the timing of the identified structural shifts and important economic and noneconomic events, and analyses rand volatility and the temporal effect of monetary policy surprises on both the spot foreign exchange market returns and volatility of the rand. In order to do this, low- and high-frequency data are employed. With regard to exchange rate modelling, the theoretical economic-exchange rate frameworks are approached both from the traditional macro-based view of exchange rate determination and a micro-based perspective. The various methodologies applied here tackle different aspects of the exchange rate dynamics. To preview the results, we find that adjusting for structural shifts in the unit root tests does not render any of the exchange rates stationary. However, the results show a remarkable fall in the estimates of volatility persistence when structural breaks are integrated into the autoregressive conditional heteroskedasticity (ARCH) framework. The empirical results also shed light on the impact of modelling exchange rates as long memory processes, the extent of asymmetric responses to ‘good news’ and ‘bad news’, the consistencies and contrasts in the five exchange rate series’ volatility dynamics, and the timing and likely triggers of volatility regime switching. Additionally, there are convincing links between the timing of structural changes and important economic (and noneconomic) events, and commonality in the structural breaks detected in the levels and volatility of the rand. We also find statistically and economically significant high-frequency exchange rate returns and volatility responses to domestic interest rate surprises. Furthermore, the rapid response of the rand to monetary policy surprises suggests a relatively high degree of market efficiency (from a mechanical perspective) in processing this information. Keywords: Exchange rate, expectations, long memory, monetary policy surprises, repo rate, structural breaks, volatility; unit root. JEL Code: C22, E52, E58, F31, F41, G14 and G15Item An analysis of exchange rate policies in the Republic of South Africa 1971-1977(2015-02-05) Gidlow, Roger MalcolmThe breakdown of the system of fixed exchange rates, which occurred in the western world in the early 1970s, has exerted marked effects upon the exchange rate policies adopted by South Africa. In particular, it has resulted in the local monetary authorities practising a more active policy concerning the exchange rate value of the rand. The purpose of this thesis is to describe and analyze the exchange rate policies of the Renublic during the period from 1971 to 1977, and to offer recommendations For change. The research procedure followed involved extensive gathering of information from published literature, together with confidential information disclosed to the writer by the Deputy Governor of the Reserve Bank. The thesis is divided into four sections. Section A reviews the traditional exchange rate policy adopted by the South African authorities, and their long-standing support for fixed but adjustable exchange rates in the international monetary system. Section B incorporates on historical review and analysis of changes in the exchange rate for the rand which have materialised since 1971. Section C focuses attention upon the attitudes of the local authorities over the issue of reform of the exchange rate regime in the international monetary system in the past few years. Section D is devoted to an analysis of specific policy issues which have arisen in the conduct of exchange rate policy in South Africa, and highlights areas where improvements could be made. All four chapters in this Section were submitted as evidence to the current Commission of Inquiry into the Monetary System and Monetary Policy in South Africa. One important conclusion of the study is that the more flexible exchange rate policy adopted in South Africa has had very limited success in affecting positively the current account of the balance of payments. Conversely exchange rate policy appears to have been more successful in improving the position on tht capital account. (iv) Another conclusion concerns deficiencies which exist in the provision of foreign exchange facilities, and particularly in regard to forward exchange. In some respects South African policy is characterized by exchange rates and facilities which bear little relation to market conditions. It is recommended that j mor># competitive market in foreign exchange should be established in both spot and forward transactions.