The impact of exchange rates on trade balances in SADC countries

This study aims to determine the impact of exchange rates on trade balances in SADC countries. Further, the study also aims to determine the existence of the J-curve phenomena in SADC countries. To achieve the objectives of the study, a panel GMM model and quantile regressions were used as a method of data analysis on data covering the period of 1993 to 2018. Panel GMM model and quantile regression were used to determine the relationships between the real exchange rate (XR), world income (WGDP), as well as gross domestic product (GDP), and trade balance (TB) of SADC countries. The SADC countries used in this study are South Africa, Mauritius, Lesotho, Angola, Malawi, Mozambique, DRC, Madagascar, Namibia, and Botswana. To provide a conceptual framework for the study, a comprehensive theoretical and empirical literature review was undertaken. Within the framework of the theoretical literature review, Magee’s (1973) J-curve phenomena were tested for its relevance and application within SADC countries. Given the main highlights of the empirical literature review, this J-curve phenomenon as well as the impact of trade balances in SADC countries, has not been addressed optimally. The main focus of previous studies in this area within SADC countries has fallen short of explaining the nature and causality of J-curve phenomena. It is in this respect that this study contributes to the regional and international trade discourse. The main findings from the quantile regression analysis in this study suggest that no evidence of "J-curve" in the case of Angola, Namibia, Mozambique, Malawi, and Madagascar. South Africa shows a delayed J curve. Lesotho an inverted J-curve, whilst DRC and Botswana show a sharp V-shape. Contrary to the "J-curve" phenomenon, as explained by the classical textbooks, the findings of the study suggest that the depreciation of Namibia, Mozambique, Angola, Malawi, and Madagascar’s exchange rates produce no J-curve phenomenon, indicating that there is no room for improving these countries’ trade balances through a currency devaluation process. Yet for countries such as South Africa, DRC, Botswana, and Mauritius the findings suggest that the depreciation of these countries’ exchange rates improves the trade balances. Concerning GMM results, the exchange rate and gross domestic product in SADC countries had a positive relationship with the trade balances in SADC countries. Further, the exchange rates also show evidence of a positive relationship with trade balances. On the contrary, the world income (represented as world GDP) has a negative relationship with trade balances in SADC countries. This implies that, as SADC currencies strengthen, the trade balance worsens. This finding presents a serious open macroeconomic challenge in SADC countries, in that the trade balances worsen irrespective of the strengths of the currencies; hence the trade balances in SADC countries have remained negative for prolonged periods. Furthermore, the world economic growth does not necessarily improve the SADC countries' trade balances either, as shown by a negative relation between world income and trade balances in SADC countries. This finding concerning world GDP, suggests that SADC countries lack export diversification and are trapped in primary product exports which, at times, are subjected to low prices. Given the above findings, it is clear that SADC countries will continue to suffer from negative trade balances, which in turn will continue to stifle their growth. To address the continued and persistent trade balances in SADC countries, policymakers should focus on an integrated open macroeconomic strategy. Such a strategy should pay special attention to improving technical skills, research, and development, quality of exports, export diversification, infrastructure; maintain the use of flexible exchange rate regimes, raise the level of productivity; substitute imports of capital equipment and support domestic industries. Furthermore, it is recommended that SADC countries focus on attracting and retaining foreign direct investments. This macroeconomic strategy should not be approached in isolation but as an integrated policy framework.Thesis (PhD) -- Faculty of Business and Economic Sciences, 202