The Limits of Depreciation as a Driver for Export Growth in South Africa: A Sectoral Analysis
Among the various tools used to drive export competitiveness, the exchange rate has always taken pre-eminence and has in practice proved to be capable of stimulating export demand when its movements have resulted in a real depreciation. South Africa is no exception, and depreciation has for many years been an explicit component of industrial policy.
New research suggests, however, that the role of the real effective exchange rate (REER) in explaining export growth has become a lot less important than supply side factors, participation in global value chains and policy uncertainty.
This working paper uses both graphic and quantitative techniques to understand the relationship between disaggregated sectoral exports and the sector-weighted real exchange rate for the period from 2005 to 2017; with attention paid to the ‘breakpoint’ that follows the global financial crisis of 2009.
The results strongly indicate that for 14 out of 15 sectors, the REER has become less influential as a driver of export performance for the period after the global financial crisis. Furthermore, the response across sectors differs widely and suggests that industrial and trade policy should be finessed to accommodate the specific responses of each sector. In some cases, there is little benefit to be derived from depreciation and policy should instead focus on enhancing competitiveness using a supply-side approach.
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