An analysis of the impact of crude oil price shocks on the exchange rate in South Africa
Numerous studies have investigated the impact of oil price shocks on the exchange rates in developed economies. However, fewer studies have examined the effect of oil price shocks in developing economies. One study by Turhan, Hacihasanoglu and Soytas in 2012 examines the dynamic effect of oil price movements in thirteen developing markets, including South Africa. Another study by Kin and Courage (2014) investigate the effect of crude oil prices on the South African exchange rate, but their modelling, time period and variables differs. The intention of the current mini-thesis, however, is investigate the effect of crude oil prices on the exchange rate of South Africa from January 1980 to December 2014. The aim of this mini-thesis is to explore the impact of crude oil price movements on the volatility of the exchange rate on the South African market. Currently emerging economies are consuming an increasing share of the world’s oil and they have therefore become larger players in the global financial markets. Basher and Sadorsky (2006:224-227) state that as countries modernise and urbanise, their demand for crude oil and its related products tends to increase. The rising economic importance of the BRICS (Brazil, Russia, India, China and South Africa) economies implies that the possibility of the consumption of oil in the developing economies could surpass the global oil consumption of developed economies. It is important to note that future oil demand cannot be predicted, but oil demand growth is highly correlated with the growth in the industrial production of a country. The use of oil for energy consumption and the use of oil trading on the stock markets and the financial markets are all linked on the path of a country’s economic growth. In order to evaluate the link between the four variables of oil prices, exchange rates, manufacturing production index and the prime rate, qualitative research methods will be used. The methods which will be applied are the vector autoregressive model and the vector error correction mechanism. This study reveals that the movement in Brent oil prices has a relatively insignificant impact on the movement of the South African rand on a monthly basis.