There are many examinations in the literature that have experimentally explored the impacts or determinants of exchange rate fluctuation on economic indicators in many countries.. South Africa neighbor countries are Namibia, Botswana, Zimbabwe, Mozambique, Switzerland and Lesotho .South Africa is the biggest country in Southern Africa. Furthermore, the 25th-biggest nation on the planet and, with near 56 million populations and it is the world’s 24th-most crowded country. The South African Rand is the currency of South Africa. Their currency rankings show that the most well-known South Africa Rand conversion scale is the USD to ZAR rate. The currency code for Rand is ZAR, and the symbol is R. A rand was worth US$1.40 from 1961 until late in 1971.By the mid-1980s high inflation and mounting political burden joined with sanctions put against the nation because of politically-sanctioned racial segregation began to dissolve its value. The currency broke above equality with the dollar for March 1982, and kept on exchanging between R 1 and R 1.30 to the dollar until June 1984. By February 1985, it was exchanging over R 2 for each dollar, and in July that year, all foreign exchanging was suspended for three days to stop Blamey (1996)
The depreciation. President P. W. Botha made his Rubicon discourse on 15 August 1985; it had weakened to R 2.40 for each dollar. And the end of 1989, the rand was exchanging at levels more than R 2.50 for each dollar. vulnerability about the future of the nation rushed the depreciation until the point that the level of R 3 to the dollar was broken in November 1992 from that point forward, most outstandingly the 1994 democratic voting which had it weakened to over R 3.60 to the dollar, the race of Tito Mboweni as the new legislative head of the South African Reserve Bank, and the introduction of President Thabo Mbeki in 1999 which had it rapidly slide to over R 6 to the dollar. After September 11, 2001 assaults, pushed it to its weakest recorded level of R 13.84 to the dollar in December 2001. This sudden devaluation in 2001 prompted a formal examination. Before the finish of 2002, the cash was exchanging under R 9 to the dollar once more, and before the finish of 2004 was exchanging under R 5.70 to the dollar. (Hakkio, 1996)
He expressed that the present estimation of any speculation opportunity relies upon expected demand, price level and relative price. Since relative price developments are not sure this vulnerability impacts speculation decision too. In an investigation of an example of 41 developing nations from year 1980 until 1990, he found a negative connection between exchange rate, real ones and development, and an immediate connection between exchange rate and inflation. Inflation in home nation is one a critical factor that may prompt currency depreciation as expressed by Souderton and Reed (1994). Oriavwote and Eshenake (2012)
X1 –inflation rate (independent variable)
Inflation is the rate at which the general level of costs for products and enterprises is rising and, subsequently, the buying energy of currency is falling. National banks struggle to constrain inflation, and stay away from flattening, with a specific end goal to keep the economy running easily. October 2017 consumer price in South Africa goes up 5 percent year on year and increasing the next month at 5.1 percent. In 1968 until 2017 the average inflation rate in South Africa found 9.15 percent, achieving a record –breaking high of 20.70 percent in January 1986 and a record low of 0.20 percent in January of 2004.In 1987 the inflation rate was 16% and it start. (Williamson, 1994).
To goes down in 1997 at 8 %.after 1997 it decreased but in 2002 it became 9%, although it declines till 2008 at rate of 11% because of the economic crisis and following years continue to decrease. (De Kock Commission, 1984).
(Independent variable) Interest is installment from a borrower or deposit taking financial foundation to a moneylender or depositor of a sum above reimbursement of the essential total. In 1987 South African deposit interest rate was 8.7% and increased the next years from 8% to 18 % we can see that there is huge increase of interest rate in South Africa but after 1993 it goes down to 11 % and after that it was increased 16% in 1998 and it declines from 16% to 7 % in 2016. Razing and Collins (1997).
3. Econometric Model
years Y X1 X2 X3
1987 2.09 16.16 8.7 3,116.81
1988 2.11 12.78 13.6 3,362.11
1989 2.53 14.73 18.1 3,584.10
1990 2.59 14.32 18.9 3,140.59
1991 2.63 15.34 17.3 3,288.29
1992 2.89 13.88 13.8 3,481.41
1993 3.19 9.72 11.5 3,389.99
1994 3.42 8.94 11.12 3,445.70
1995 3.63 8.68 13.6 3,752.65
1996 3.95 7.36 14.9 3,496.92
1997 4.42 8.59 15.4 3,555
1998 4.98 6.88 16.5 3,161.12
1999 6.15 5.18 12.3 3,088.86
2000 6.39 5.34 9.2 3,037.27
2001 7.77 5.71 9.4 2,681.71
2002 11.47 9.17 10.8 2,518.40
2003 7.91 5.86 9.8 3,775.61
2004 6.71 1.39 6.7 4,863.52
2005 5.85 3.39 6.1 5,414.63
2006 6.28 4.64 7.2 5,631.70
2007 7.39 7.09 9.2 6,125.04
2008 7.99 11.54 11.6 5,786.60
2009 10.32 7.13 8.6 5,888.60
2010 7.46 4.26 6.5 7,362.76
2011 6.91 5 5.7 8,049.95
2012 7.59 5.66 5.5 7,548.16
2013 9.11 5.75 5.2 6,876.95
2014 10.79 6.07 5.8 64,797.63
2015 12.26 4.59 6.2 5,769.77
2016 15.23 6.33 7.2 5,273.59
GROSS DOMESTIC PRODUCT
Gross domestic product is one of the essential indicators used to gage the wellbeing of a nation’s economy. It speaks to the total dollar value of all products and goods delivered over a particular time also you can consider it the span of the economy. More often than not, GDP is communicated as a correlation with the past quarter or year. In 2016 the gross domestic
Product in South Africa was worth 5,273 million dollar .The GDP estimation of South Africa represents to 0.48 percent of the world economy. 1960 until 2016 the gross domestic product found the average of 131.26 billion dollar, achieving an untouched high of 416.42 USD Billion of every 2011 and a record low of 7.58 USD Billion out of 1960.in 2011 the gross domestic product per capital in south Africa was 8,049 USD and decreased the next years 7 thousand to 6 thousand, while in 2015 it was 5,769 and 2016 it was 5,273USD. Aguirre and Calderon (2005).
The gross domestic product (GDP) measures of national income and output for a given country’s economy. The gross domestic product (GDP) is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time. This page provides the latest reported value for – South Africa GDP – plus previous releases, historical high and low, short-term forecast and long-term prediction, economic calendar, survey consensus and news. South Africa GDP – actual data, historical chart and calendar of releases – was last updated on November of 2018Clements and Hendry (1995)
Finally, in my model I can say that it is a good model when we look the heteroskedasticity white and arch test for both of them they are bigger than 0.05 and as long as there is homoscedasticity the model is good, while my independent variables interest rate and inflation rate in south Africa are affected negatively to the exchange rate on the other side GDP of south Africa is positively affected to the exchange rate, although there is autocorrelation in serial LM test because of it is less than 0.05. When I was eliminating the autocorrelation I use ; covariance and there were no difference between my previous estimating equations 01 the only difference that I saw there was t- statistic and standard error. Hausmann et al. (2005)
Tolcha, Tassew Dufera and Dr Nandees “determinants of real exchange rate in Ethiopia.”July 2016.
World Bank data. https://data.worldbank.org
Jonada, Tafa. “Relationship between exchange rate and interest rate” : case Albania.
Jibrin Daggash and Terfa W. Abraham. “Effect of Exchange Rate Returns on Equity Prices: Evidence from South Africa and Nigeria”.
Ekaterina Tertyshnaya, Tregub. “Effects of Exchange Rate Changes on Important Economic Indicators on the Example of Romania”.
Razing and Collins (1997) AND Aguirre and Calderon (2005)
Thus, Hausmann et al. (2005), Gl¸zmann et al. (2012)
Rodrik (2008), I Nino et al. (2011), In Di Nino at al (2011),
Goldfaijn and Baig (1998) , Goldfajn and Gupta (1999
Furman and Stiglitz (1998) , Oriavwote and Eshenake (2012)
Prepared by:Khadijo Ali Mohamed