The effects of oil price uncertainty on economic activities in South Africa

Abstract

This paper investigates the link between oil price uncertainty shocks and key macroeconomic indicators of a net oil importing country, South Africa. Monthly data covering the period 1990:01 to 2015:12 is used. The Structural Vector Autoregressive (SVAR) methodology is applied incorporating realized volatility as an indicator of oil price uncertainty to investigate the short run effects of oil price uncertainty. The Generalised Impulse Response Functions (GIRF) analysis reveals that for most variables, oil price uncertainty shock has an adverse and persistent effect over time. Consistent with GIRF, the Generalised Forecast Error Variance Decompositions (GFEVDs) analysis also points out that oil price uncertainty shocks contributes substantially to variations in real output, inflation and various macroeconomic variables of South Africa. Therefore, SVAR analysis reveals the significant role of exogenous oil prices on the economy of South Africa when price uncertainty shocks exist. The policy implications of these findings are drawn.

Keywords:

• oil price uncertainty
• volatility
• economic activities
• short run
• SVAR
• South Africa

JEL classification:

• C32
• E32
• Q43

PUBLIC INTEREST STATEMENT

South Africa is an oil importing economy which highly depends on non-renewable energy. It continues to dominate the region’s consumption of both petroleum and total energy. The exogenously determined oil prices potentially generate uncertainties in the whole economy. The purpose of this paper is to characterize the impact of the oil price uncertainty shock on a small open economy like South Africa taking a holistic approach focusing on several macroeconomic variables. The study empirically tracks out how the oil price uncertainty shock affects economic activities in the economy using the Structural Vector Autoregressive (SVAR) model. It employs realised volatility as a proxy for uncertainty as volatility is known to display surges of uncertainty following major shocks. The transmission channels through which spill overs from policy specific shocks follow are also observed. The aim is to trigger conversations around the long-term energy policies of South Africa to mitigate economic uncertainties.

Notes

1. This justifies proceeding with the variables in levels. However, in section 4.3 robustness check is performed using the growth rates of variables.

2. These results are available from the authors upon request.

3. Results of the contemporaneous structural coefficients are available from authors on request.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Junior T. Chiweza

Junior Chiweza is a graduate with a Master’s degree in Economics from the University of Pretoria. She also holds an Honours degree in Economics and undergraduate degree in Business Management and Economics. Her overarching research interests are around Growth and Development, Monetary Theory and Policy, and Applied Econometrics. Recently, her focus has been around evaluating the impact of uncertainty examining context based interventions aimed at improving energy policies by exploring the challenges facing South Africa.

Goodness C. Aye

Dr. Goodness C. Aye holds a PhD in Agricultural Economics from University of Pretoria. She obtained her Bachelors and Master’s degree in the same field. She is a Senior Lecturer and Researcher with interest in agricultural and economic policy analysis, financial markets, development, energy and environmental economics. She has published widely, presented papers in conferences in many continents, a reviewer and editor for high ranking journals. She teaches and supervises both undergraduate and graduate students.