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Uncertainty behind SA’s sluggish exports
Uncertainty behind SA’s sluggish exports

Uncertainty behind SA’s sluggish exports

ECONOMIC NEWS

Business Day Live - Jun 13th 2016, 12:54

A new academic study has come up with an answer to a question that has puzzled economists for some time now: why is it that the cheap rand has done so little to boost SA’s exports? 

The answer, from IMF economists Sandile Hlatshwayo and Magnus Saxegaard, lies in SA’s high levels of political and policy uncertainty.

When uncertainty is high, firms tend to adopt a "wait-and-see" approach to making large, export-related investments.

In theory, a weaker exchange rate should help make exporters more competitive on global markets, helping them ride out downswings in demand. However, SA’s export performance has been sluggish even though the rand has declined significantly since 2011 against a basket of currencies, losing about 40% to the dollar since the end of 2014.

Latest data from Statistics SA show that exports declined 7.1% in real terms during the first quarter of 2016, after increasing only 3.8% in 2015.

The authors of the IMF study, who crunched the numbers only for the period to 2014, found that factors such as weak global demand did little to explain SA’s sluggish export growth. However, indices of economic policy and political uncertainty that they constructed based on "news chatter" in the media proved to be linked strongly to export performance.

SA’s real effective exchange rate depreciated 20.6% from the end of 2011 to early 2014, but over the same period, export volumes rose only 6.8%, Hlatshwayo and Saxegaard write.

They found that policy uncertainty had diminished the responsiveness of exports to relative price changes. Higher levels of uncertainty, combined with electricity constraints, largely explained why SA’s exports had been so much less responsive during 2011-2014 to exchange rate depreciation than they had been historically.

They suggest this is because of the direct constraining effect that uncertainty has on export-related investment decisions including capital spending and the costs of developing export markets.

"But it is also because of the indirect effect, when the "noise" of policy uncertainty and of exchange rate volatility hampers exporters’ ability to respond to the price signals of a weaker exchange rate. 

Read more about: south africa | imf | exports | economy

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