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Southern Africa Economic Outlook 2018
12/03/2018 13:51
Southern Africa Economic Outlook 2018
The economic outlook for the Southern Africa region is cautious. Broad-based economic activity is expected to recover at a slow pace, but the outlook remains modest, given the diverging growth patterns for the region’s economies. Upper middle-income countries turned in low and declining rates of growth. Meanwhile, lower income transitioning economies recorded moderate and improved growth, albeit at reduced rates. Despite the improvement, economic performance remains below the regional target of 7 percent annual economic growth for all member states. The region’s economic outlook continues to face major headwinds: high unemployment, scal strain, increasing debt, and high in ation. Real GDP is estimated to have grown at an average of 1.6 percent for 2017, before increasing to a projected 2.0 percent in 2018. Future regional growth is bolstered primarily by expectations of increased investment in non-oil sectors such as electricity, construction, and technology, in large infrastructure projects, and in mining, as well as a continued recovery of commodity prices. Net commodity exporters and low-income economies, generally, are outperforming their larger net manufacturing exporter counterparts. The decline in commodity prices in recent years, reaching their lowest point in 2015, translated into signi cant income losses for these economies, implying negative impacts on public and private sector spending, and therefore growth and employment.Read more
Working Paper 272 - Price effects of borders between Lesotho and South Africa
19/06/2017 16:49
Working Paper 272 - Price effects of borders between Lesotho and South Africa

Categories: Lesotho, South Africa

Working Paper 263 - Factor Productivity and Potential Output Growth in South Africa
17/05/2017 14:29
Working Paper 263 - Factor Productivity and Potential Output Growth in South Africa

Categories: South Africa

Working Paper 244 - Occupational choice and agricultural labor exits in Sub-Saharan Africa
20/10/2016 15:19
Working Paper 244 - Occupational choice and agricultural labor exits in Sub-Saharan Africa
Southern Africa Quarterly Report 3rd Quarter -2014 - Issue No.14
11/11/2015 14:25
Southern Africa Quarterly Report 3rd Quarter -2014 - Issue No.14
Working Paper - 220 - Developing a Food (in) Security Map for South Africa
09/03/2015 17:15
Working Paper - 220 - Developing a Food (in) Security Map for South Africa

Categories: South Africa

Working Paper - 216 - Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa
20/01/2015 16:51
Working Paper - 216 - Inflation Targeting Monetary Policy, Inflation Volatility and Economic Growth in South Africa

Categories: South Africa

Southern Africa Quarterly Report 2nd Quarter-2014 Issue No.13
05/11/2014 10:21
Southern Africa Quarterly Report 2nd Quarter-2014 Issue No.13
Southern Africa Quarterly Review and Analysis – 1st Quarter 2014 - Issue 12
26/08/2014 11:18
Southern Africa Quarterly Review and Analysis – 1st Quarter 2014 - Issue 12
Southern Africa Quarterly Review and Analysis – 4th Quarter 2013 - Issue 11
19/02/2014 15:08
Southern Africa Quarterly Review and Analysis – 4th Quarter 2013 - Issue 11
Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa
23/12/2013 09:42
Working Paper 189 - An Empirical Investigation of the Taylor Curve in South Africa
Heightened uncertainty and slow growth following the financial crisis have raised expectations about the role of monetary policy in stimulating growth. At the same time, South Africa’s economy has been subject to a number of severe supply-side shocks and the output gap remains negative and wide. Inflation has breached the upper limit (6 per cent) of the target band, albeit for short periods, and the forecast remains persistent towards the upper limit of the target range. Inflation expectations remain marginally above the target band at 6.1 per cent until 2015. The Monetary Policy Committee (MPC) has been facing tough choices as it tries to support a tenuous recovery and bring inflation within the target range. In light of these developments, the paper empirically estimates the relationship between output volatility and inflation volatility without the need to assume that the economy is always operating on the Taylor curve. To this end, first it tries to establish whether the Taylor curve has shifted over time. Second, assess the nature of the departures from the Taylor curve, by looking at the structural (demand and supply) shocks to the conditional volatilities of inflation and the output gap. Third, it assesses the optimality of monetary policy by applying the Taylor principle. Thereafter, assuming a constant Taylor curve, it plots the estimated relative degrees of the South African Reserve Bank’s (SARB or the Bank) preferences over time, irrespective of whether the policy settings were optimal or sub-optimal. Estimates of the correlation between inflation and the output gap are estimated as a time-varying process, in contrast to constant correlations. The paper estimates a mean modified multivariate GARCH model capturing the effects of openness through the exchange rate consistent with the characterization of South Africa as a small open economy. The relationship between the two volatilities is mapped using rolling correlations and impulse responses. Using a VAR framework of unconditional variance, it examines how structural shocks derived from the mean equations affect each of the conditional variances. The results show that the Taylor curve has shifted over the sample period. The Taylor curve shifted inwards under the inflation-targeting regime relative to the pre-inflation-targeting period, implying that the volatilities of inflation and the output were minimised. However, relative to the period before the financial crisis (2000Q1 to 2007Q2), the Taylor curve has shifted outwards as both volatilities have increased during the financial crisis (2007Q3 to 2012Q3). Furthermore, the results indicate that economic growth performance is superior in periods in which the Taylor curve relationship holds, that is, when the volatility in both inflation and the output gap is minimal. The results from the VAR framework show that the effects of demand and supply shocks on the volatilities of inflation and the output gap are transitory. Evidence from the assessment of the inflation and output-gap correlations when the Bank’s policy-setting behaviour is characterised by a Taylor rule suggests optimal monetary policy settings or conduct during the inflation-targeting regime relative to earlier regimes. This implies that policymakers have managed to execute the mandate of flexible inflation-targeting The study shows that, the shift to the inflation-targeting regime minimised the inflation volatilities and ensured price stability. Alternatively, the conduct of policy managed to minimise both anticipated and unanticipated deviations in inflation. However, the results of the shifts in the Taylor curve since the onset of the financial crisis suggest that policymakers should aim at reducing the volatility in inflation and growth with the intention of stabilising it around the levels associated with those around the origin. Given that these volatility measures capture both anticipated and unanticipated deviations. The anticipated volatility deviations can be discounted or hedged by economic agents, whereas the unanticipated component affects investment and spending decision-making by economic agents. Therefore, policymakers should try to minimise the unanticipated volatility component as it adversely affects economic growth performance.Read more
Economic Brief - An Empirical Investigation of the Taylor Curve in South Africa: A Non-technical Note and Policy Brief
18/12/2013 14:01
Economic Brief - An Empirical Investigation of the Taylor Curve in South Africa: A Non-technical Note and Policy Brief
Southern Africa Quarterly Review and Analysis – 3rd Quarter 2013 - Issue 10
29/11/2013 16:32
Southern Africa Quarterly Review and Analysis – 3rd Quarter 2013 - Issue 10
Southern Africa Quarterly Review and Analysis – 2nd Quarter 2013 - Issue 9
29/08/2013 16:13
Southern Africa Quarterly Review and Analysis – 2nd Quarter 2013 - Issue 9
Regional Integration Policy Papers - Intra-Regional Trade in Southern Africa: Structure, Performance and Challenges
05/08/2013 23:00
Regional Integration Policy Papers - Intra-Regional Trade in Southern Africa: Structure, Performance and Challenges
Southern Africa Quarterly Review and Analysis – 1st Quarter 2013 - Issue 8
27/05/2013 13:57
Southern Africa Quarterly Review and Analysis – 1st Quarter 2013 - Issue 8
Indian Ocean Commission Countries a Flagship Study on Regional Integration - Summary Final Report
15/05/2013 11:02
Indian Ocean Commission Countries a Flagship Study on Regional Integration - Summary Final Report
Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy: Structural Vector Autoregression Model Evidence
10/12/2012 08:58
Working Paper 161 - The Impact of Euro Area Monetary and Bond Yield Shocks on the South African Economy: Structural Vector Autoregression Model Evidence
The study investigates the various channels through which an unexpected positive shock in euro area bond yields and expansionary monetary policy are transmitted to South Africa using structural vector autoregression models. This investigation is motivated by the adoption of large-scale balance-sheet tools by various central banks and the on-going sovereign debt problems in the euro area. It is important for South African policymakers to understand how these effects are transmitted to the domestic economy. First, we find evidence consistent with the predictions of capital flow effects on asset prices, which includes depressed bond yields, stock price re-valuation and exchange rate appreciation due to monetary stimulus in the euro area. These responses affirm the importance of the asset price channel in transmitting shocks from the euro area to South Africa.&nbsp; Second, we assessed the negative effects of the large economy’s monetary policy stimulus on the small economy as predicted by the Mundell–Fleming model. We find a significant drop in broad money supply growth, a decline in interest rates and a muted trade balance reaction. Hence, we conclude that there is weak evidence of the trade balance channel.&nbsp; Third, we find that a positive shock on euro area long-term bond yields leads to a significant, but delayed, effect on the exchange rate of the rand to the euro. Extending the sample to include the current period of global economic instability and applying the counterfactual analysis shows that the exchange rate was overvalued between 2010 and 2011. First, we found that South African nominal bond yields decline on impact, a revaluation in real stock prices and a significant rand–euro exchange rate appreciation. This is evidence consistent with predictions of the effects of capital flows on asset prices due to the euro area monetary policy stimulus. All these responses confirm the importance of the asset price channel in transmitting shocks to the South African economy and are consistent with the predictions of the effect of capital inflows. <br />Second, we assessed the negative effects of the large economy’s monetary policy stimulus on a small open economy as suggested by the Mundel-Fleming model. We find a significant decline in M3 growth, while interest rates decline over the same period. In addition, we find a muted trade balance reaction, which possibly reflects the opposing effects of the exchange rate appreciation and lower interest rates on the trade balance. Finally, we find that a positive euro area long-term bond yield shock leads to a significant, but delayed rand–euro exchange rate depreciation. There is also evidence of a positive response of South African nominal bond yields to euro bond yields, which suggests some degree of interconnectedness between these markets and the role of the risk premium. The persistent goods price inflation and prolonged exchange rate depreciation also point to the increased risk premium demanded by investors to hold South African bonds.Read more
Working Paper 160 - Infrastructure Investment and Economic Growth in South Africa: A Granger Causality Analysis
10/12/2012 08:52
Working Paper 160 - Infrastructure Investment and Economic Growth in South Africa: A Granger Causality Analysis
The objective of this study is to examine the causal links between the public sector economic infrastructure investment, economic growth and public and private sector employment using (i) pairwise Granger casualty analysis, and (ii)&nbsp; autoregressive distributed lag (ARDL) or bounds test approach for cointegration analysis to investigate long term equilibrium relationships among the variables in question. &nbsp; This paper conducted pairwise Granger causality tests between economic growth, economic infrastructure investment, and employment in South Africa for the period 1960-2009 using bivariate vector autoregression (VAR) model with and without a structural break. The result indicates that there is strong causality between economic infrastructure investment and GDP growth that runs in both directions implying that economic infrastructure investment drives the long term economic growth in South Africa while improved growth feeds back into more public infrastructure investments. We also found a strong two way causal relationship between economic infrastructure investment and public sector employment reflecting the role of such investments on job creation through construction, maintenance and the actual operational activities, while increased employment could in turn contribute to further infrastructure investments indirectly through higher aggregate demand and economic growth. Further, there is strong unidirectional causal link between economic growth and public sector employment that runs from the former to the latter; and a strong one way causal link between private sector employment and economic growth that runs from the former to the latter. Economic growth appears to be one of the main drivers of public sector jobs but not the private sector ones and that while the private sector employment remains one of the key drivers of growth, the latter does not seem to have translated into more jobs, reflecting the much criticized scenario of jobless growth in the economy. The pairwise causality test results were assessed further using the ARDL or bounds testing approach for cointegration to assess both the short-and long-run relationships among the variables in question. The bounds test results indicate the presence of steady-state long-run equilibrium relationship between economic growth, economic infrastructure investment, formal employment, and exports and imports of goods and services providing a theoretical foundation for the empirical results of the pairwise Granger causality tests. Public infrastructure investment is found to be a strong driver of economic growth and public sector employment in South Africa. Therefore, the South African government needs to increase and sustain high level of economic infrastructure investment into many more years in the future in order to ensure sustained reduction in current inequalities in income distribution and high level of poverty and unemployment ravaging the economy. On the other hand, the apparent lack of casual link that runs from economic growth to private sector employment implies that enhanced economic growth may not directly translate into more job creation in the private sector, despite strong contribution of the latter to economic growth.&nbsp; The scenario of jobless growth has already been recognized in the economy and appropriate policies must be formulated to ensure that economic expansion is geared towards more labour intensive or inclusive growth than more capital intensive growth path.Read more
Working Paper 157 - How are the US Financial Shocks Transmitted into South Africa? Structural VAR Evidence
08/10/2012 14:23
Working Paper 157 - How are the US Financial Shocks Transmitted into South Africa? Structural VAR Evidence
This paper investigates the transmission of unanticipated US bond yield increases, monetary policy stimulus and the federal funds rate tightening shocks into South Africa using small open economy structural VAR models. We intend to inform policy-makers about the channels impacted on by external developments, which may make policies designed and targeted at dealing with domestic macroeconomic issues, ineffective. First, the US monetary stimulus shock leads to low inflation, rand-dollar appreciation, revaluation in stock prices, depressed bond yields, a decline in monetary aggregates and real interest rates in South Africa. Despite a weaker trade channel result, all other findings are consistent with the predictions of the Mundell-Fleming model of a small open-economy. Second, an unexpected increase in US medium-term bond yields leads to depreciation in the rand-dollar exchange rates and a rise in bond yields, in line with the portfolio balance approach. In addition, a significant stock price decline occurs after two quarters and supports the idea of portfolio re-allocation or rebalancing driven by a change in the return from bonds. Third, we find that the unexpected US federal funds rate tightening leads to a significant increase in SA bond yields, depreciation in the rand-US dollar exchange rate and a delayed response in consumer price inflation. Overall these findings suggest that the South African economy is highly responsive to external shocks, which may destabilise the economy and limit the effectiveness of policies designed to deal with domestic macroeconomic problems. In the absence of regional and bilateral trade agreements, the policies impacted by the exchange rate encompass those directed at enhancing export performance and achieving higher levels of and sustainable growth. An exchange rate appreciation will reduce exports through a decline in&nbsp; competitiveness. In the absence of good hedging strategies, a strong exchange rate makes manufactured goods expensive and reduces receipts of key exporters such as the mining sector, in turn, this may lead to increased production costs and job losses. The elevated stock prices are possibly not reflecting economic fundamentals and may indicate instead that capital is being misallocated and the levels may not be sustainable. This implies an imminent threat to the soundness of the economy and with finacial stability consequences. While an unexpected rise in bond yields due to unexpected foreign developments indicates possibly unexpected increases in debt service costs, this may require the re-allocation of resources to alternative projects and, therefore, different outcomes relative to initial projections. In addition the repayment costs driven by high debt servicing costs may be compounded by the depreciation in the exchange rate.&nbsp; The latter also has an impact on the South African Reserve Bank’s (SARB’s) foreign reserve accumulation strategy and can reduce foreign reserve accumulation and therefore impact on its ability to adequately cover external foreign short-term debt and imports.Read more
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