Energy and Commodity Price Volatility in Sub-Saharan Africa: The Role of Uncertainty

Abstract

This thesis, focusing on sub-Saharan Africa, investigates the relationship between energy prices, agricultural commodity markets, and policy/events uncertainties. The research is divided into three distinct yet interconnected papers, each employing unique methodologies and data to address specific aspects of this issue. The first paper examines the dynamic relationship between oil prices and food security in sub-Saharan Africa, accounting for the moderating role of global uncertainty, as measured by the World Uncertainty Index. Utilizing a Pooled Mean Group Autoregressive Distributed Lag (PMG-ARDL) model, the study reveals that oil price shocks and heightened global uncertainty negatively impact food security in the region. The effects are found to be homogenous across countries in the region. The second paper analyses the role of geopolitical risk in the extreme spillovers between energy prices and agricultural commodity prices. Employing a time-varying parameter vector autoregression (TVP-VAR) model and disaggregated geopolitical risk measures, the study finds evidence of significant time-variation and asymmetry in extreme spillovers. Geopolitical risk events significantly influence the intensity and direction of these spillovers, with different risk categories exhibiting varying impacts. In the third paper, the study examines the effect of climate risk on the dynamic spillovers between oil prices and food prices in the sub-Saharan region. Utilizing a GARCH-MIDAS approach for 10 countries, the study reveals that climate risk significantly affects the volatility and interconnectedness of these markets. The findings underscore the importance of accounting for climate risk in assessing the vulnerability of food systems to oil price shocks. Specifically, the results for paper one show a strong positive significance at 1% level of significance for the five variables including oil prices, WUI, GDP per capita, exchange rate, and the dummies used to control for the structural breaks. The three forms of geopolitical risk are net shock receivers, except for the narrow definition, which is a net shock giver. The narrow definition, likely referring to direct conflicts or wars, shows the highest net connectedness in all countries except Nigeria, where it is second to oil. The lagged impact of climate risk on the volatility of the oil-food connectedness index is captured by 𝜃 in paper three. The results show positive and significant values of 𝜃 in six countries (Angola, Ghana, Kenya, Senegal, South Africa, and Tanzania), indicating that, on average, an increase in the climate change variable, like higher temperatures, is associated with an increase in the volatility of the connectedness between oil and food prices. iii Overall, across all three papers, the findings have important implications for policymakers and stakeholders seeking to enhance food security and economic stability in the face of increasing uncertainties. The findings of this thesis underscore the critical need for policymakers in sub- Saharan Africa to adopt a holistic and multi-dimensional approach to address food security challenges in the face of increasing uncertainties. Policymakers should explicitly acknowledge and account for policy uncertainties in their decision-making processes. This involves developing flexible and adaptive policy frameworks that respond effectively to unforeseen shocks and changing market conditions. Given the heterogeneous impact of oil price volatility and uncertainty on different developing economies, policymakers should prioritize targeted interventions that protect the most vulnerable populations. Reducing dependence on imported oil and diversifying energy sources can enhance resilience to oil price shocks. Similarly, promoting agricultural diversification and supporting local food production can reduce vulnerability to global food market fluctuations for papers one and two. Moreover, there is a need to enhance regional cooperation and integration to help mitigate the adverse effects of geopolitical risks and climate change on food security for papers two and three respectively. This may involve sharing information, coordinating policies, and investing in regional infrastructure and early warning systems. Encouraging sustainable agricultural practices and investments in renewable energy can contribute to long-term food security and environmental sustainability. This includes promoting soil conservation, water management, and agroforestry practices. By adopting these policy recommendations, policymakers can create a more resilient and sustainable food system in sub-Saharan Africa, capable of withstanding the challenges posed by oil price volatility, geopolitical risk, and climate change. It highlights the need for tailored policy interventions that address the specific vulnerabilities of different countries and account for the time-varying and asymmetric nature of market interactions.