Current Account Sustainability of South Africa with Regime Shifts
DOI:
https://doi.org/10.21776/ub.jiae.2023.011.02.5Keywords:
Current account sustainability, Intertemporal budget constraint, Regime shifts, South AfricaAbstract
Purpose
This study investigates the sustainability of current account with possible regime shifts in South Africa.
Design/methodology/approach
The study makes use of an annual data spanning from 1980 to 2021, the data is collected from International monetary fund. To ensure the order of integration of variables, the study used Fourier LM unit root test and Minimum LM unit root test. The study uses maki cointegration test with multiple structural breaks to examine the long run relationship between the variables in the presence of structural breaks.
Findings
Maki cointegration test confirmed a long run relationship between exports and imports of goods and services. The results indicate that the current account sustainability of South Africa is weakly.
Research limitations/implications
This study did not consider the effect of nonlinearities in the modelling processes. Another drawback of this study is that it did not use frequency analysis such as wavelet /Fourier transform since the current account can be affected by volatilities in the domestic and global markets. Therefore, for future studies it will be better if they overcome the limitations of this study.
Originality/value
This study focuses specifically on the issue of current account sustainability, taking into consideration the possible consequences of structural changes brought about by South Africa's prior economic crises. In addition, this study recommends the devaluation of currency for South Africa to ensure that the exports always exceed imports or the improvement in the current account deficit.
References
Afonso, A., Huart, F., Jalles, J. T., & Stanek, P. (2020). Long-run relationship between exports and imports: current account sustainability tests for the EU. Portuguese Economic Journal, 19(2), 155-170.
Amadeo, K. (2021). current account and it’s components. https://www.thebalancemoney.com/current-account-definition-and-4-components-3306265
Apergis, N., Katrakilidis, K. P., & Tabakis, N. M. (2000). Current account deficit sustainability: The case of Greece. Applied Economics Letters, 7(9), 599-603.
Baharumshah, A. Z., Lau, E., & Fountas, S. (2005). Current account deficit sustainability: A panel approach. Journal of Economic Integration, 514-529.
Dickey, D. A., & Fuller, W. A. (1981). Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica: journal of the Econometric Society, 1057-1072.
Donoso, V., & Martin, V. (2014). Current account sustainability in Latin America. The Journal of International Trade & Economic Development, 23(5), 735-753.
Draper, P., & Freytag, A. (2008). South Africa's Current Account Deficit: Are Proposed Cures Worse Than the Disease? South African Institute of International Affairs.
Dulger, F., & Ozdemir, Z. A. (2005). Current Account Sustainability in Seven Developed Countries. Journal of Economic & Social Research, 7(2).
Enders, W., & Lee, J. (2012). A unit root test using a Fourier series to approximate smooth breaks. Oxford bulletin of Economics and Statistics, 74(4), 574-599.
Garg, B., & Prabheesh, K. (2021). Testing the intertemporal sustainability of current account in the presence of endogenous structural breaks: Evidence from the top deficit countries. Economic Modelling, 97, 365-379.
Gnimassoun, B., & Coulibaly, I. (2014). Current account sustainability in Sub-Saharan Africa: Does the exchange rate regime matter? Economic Modelling, 40, 208-226.
Gregory, A. W., & Hansen, B. E. (1996). Residual-based tests for cointegration in models with regime shifts. Journal of econometrics, 70(1), 99-126.
Hakkio, C. S., & Rush, M. (1991). Is the budget deficit “too large?”. Economic inquiry, 29(3), 429-445.
Hasdemir, E., Omay, T., & Denaux, Z. S. (2019). Testing the current account sustainability for BRICS countries: Evidence from a nonlinear framework. Economics Bulletin, 39(1), 310-320.
Hatemi-j, A. (2008). Tests for cointegration with two unknown regime shifts with an application to financial market integration. Empirical economics, 35(3), 497-505.
Husted, S. (1992). The emerging US current account deficit in the 1980s: a cointegration analysis. The review of Economics and Statistics, 159-166.
Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica: journal of the Econometric Society, 1551-1580.
Krugman, P., & Wells, R. (2013). Economics.3rd ed. New York: Worth Publishers.
Lanzafame, M. (2014). Current account sustainability in advanced economies. The Journal of International Trade & Economic Development, 23(7), 1000-1017.
Lee, J., & Strazicich, M. C. (2003). Minimum Lagrange multiplier unit root test with two structural breaks. Review of economics and statistics, 85(4), 1082-1089.
Livingston, E. H. (2004). The mean and standard deviation: what does it all mean? Journal of Surgical Research, 119(2), 117-123.
Maki, D. (2012). Tests for cointegration allowing for an unknown number of breaks. Economic Modelling, 29(5), 2011-2015.
Mann, C. L. (2002). Perspectives on the US current account deficit and sustainability. Journal of Economic Perspectives, 16(3), 131-152.
Mosikari, T., & Stungwa, S. (2023). Fiscal Decentralization and Economic Growth in South Africa: A South African Perspective. Acta Universitatis Danubius. Œconomica, 19(1).
Murat, S., Hobikoğlu, E. H., & Dalyancı, L. (2014). Structure and sustainability of current account deficit in Turkish economy. Procedia-Social and Behavioral Sciences, 150, 977-984.
Myint, H. (1958). The “classical theory” of international trade and the underdeveloped countries. The Economic Journal, 68(270), 317-337.
Önel, G., & Utkulu, U. (2006). Modeling the long-run sustainability of Turkish external debt with structural changes. Economic Modelling, 23(4), 669-682.
Pesaran, M. H., Shin, Y., & Smith, R. J. (2001). Bounds testing approaches to the analysis of level relationships. Journal of applied econometrics, 16(3), 289-326.
Pfaff, B. (2008). Analysis of integrated and cointegrated time series with R. Springer Science & Business Media.
Phillips, P. C., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
Reed, M., Najarzadeh, R., & Sadati, S. Z. (2019). Analyzing the relationship between budget deficit, current account deficit, and government debt sustainability. Journal of WEI Business and Economics, 8(1), 20-31.
Roubini, N., & Wachtel, P. (1999). Current-account sustainability in transition economies. In Balance of payments, exchange rates, and competitiveness in transition economies (pp. 19-93). Springer.
Samuel, C. (2013). The dark side of foreign direct investment: A South African perspective.
SARB. (1984). Annual Economic Report. Retrieved from https//:www.resbank.co.za/en/home/publication-detail-pages/reports/annual-economic-reports/1984/5556
SARB. (1987). Annual Economic Report - 1987. https//:www.resbank.co.za/en/home/publication-detail-pages/reports/annual-economic-reports/1987/5556
SARB. (1992). Annual Economic Report. https//:www.resbank.co.za/en/home/publication-detail-pages/reports/annual-economic-reports/1992/5556
SARB. (2003). Annual Economic Report. https//:www.resbank.co.za/en/home/publication-detail-pages/reports/annual-economic-reports/2003/5556
SARB. (2007). Annual Economic Report. https//:www.resbank.co.za/en/home/publication-detail-pages/reports/annual-economic-reports/2007/5556
SARB. (2013). Annual economics report. https//:www.resbank.co.za/en/home/publication-detail-pages/reports/annual-economic-reports/2013/5556
Searle, P., & Mama, A. T. (2010). The sustainability of South African current account deficits. University of Cape Town Working Paper, 188.
Shastri, S., Giri, A., & Mohapatra, G. (2018). An empirical assessment of current accounts sustainability for major South Asian economies. South Asian Journal of Business Studies, 7(2), 172-188.
Stock, J. H., & Watson, M. W. (1993). A simple estimator of cointegrating vectors in higher order integrated systems. Econometrica: journal of the Econometric Society, 783-820.
Strauss, I. (2017). Understanding South Africa’s current account deficit: The role of foreign direct investment income. Transnational Corporations, 23(2), 49-80.
Tastan, S., & Aric, K. H. (2016). Sustainability of current account deficits in BRICS countries. Journal of Business Economics and Finance, 5(2), 165-170.
Wu, J.-L., Fountas, S., & Chen, S.-L. (1996). Testing for the sustainability of the current account deficit in two industrial countries. Economics Letters, 52(2), 193-198.
Downloads
Published
Issue
Section
License
Copyright (c) 2023 Journal of Indonesian Applied Economics
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
