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In this update we take a look at South Africa's monthly trade balance (exports-imports) with the rest of the world and compare it to the movement and behaviour of the Rand.
We have mentioned before that it seems like the South African trade balance improves as the Rand strengthens and the trade balance gets worse as the exchange rate weakens. And this is in contrast to basic economic theory. |
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Trade balance per month
The interactive graphic below shows South Africa's trade balance (exports - imports) for each month from the start of 2010 as well as the average Rand/US Dollar exchange rate for the corresponding month. The trade balance values are reflected on the left hand axis while the Rand/US Dollar is shown on the right hand axis.
Economic theory dictates that a country's trade balance will improve as a country's exchange rate weakens (depreciates), and the trade balance will be negatively impacted if a country's exchange rate strengthens (appreciates). Why is this? Well as a country's exchange rate weakens, it becomes more expensive for that country to import goods from other countries, lowering imports, but in addition to this, the weaker exchange rate makes local goods cheaper to buy for foreigners, which boosts exports. Thus imports are lowered and exports are increased and this will lead to an improved trade balance.
And the reverse is also true that as a local currency strengthens, it becomes cheaper to buy goods from foreign countries, so imports will increase, but at the same time the stronger local currency makes it more expensive for foreigners to buy local goods, leading to lower level of exports. Thus higher imports, lower exports and a more negative trade balance.
So why is it that this does not seem to hold true for South Africa? As the graphic shows as the exchange rate weakened (especially mid 2011's to mid 2016's), yet we had a continued negative trade balance. Clearly the economic theory above does not seem to hold true.
Well our potential reasons for this is discussed below:
So our theory is the stronger the Rand, the cheaper the essentials we import, such as crude oil. And the savings in our cheaper imports, offsets potential losses in exports due to the stronger Rand.
And the reverse is also true that as a local currency strengthens, it becomes cheaper to buy goods from foreign countries, so imports will increase, but at the same time the stronger local currency makes it more expensive for foreigners to buy local goods, leading to lower level of exports. Thus higher imports, lower exports and a more negative trade balance.
So why is it that this does not seem to hold true for South Africa? As the graphic shows as the exchange rate weakened (especially mid 2011's to mid 2016's), yet we had a continued negative trade balance. Clearly the economic theory above does not seem to hold true.
Well our potential reasons for this is discussed below:
- Goods South Africa exports have seen significant price declines in the last couple of years, offsetting any Rand weakness benefits. Think about the Gold and Platinum price. Even though the Rand weakened the dollar price of commodities exported has declined too. Basically the drop in the commodity prices offsets benefits of the weaker exchange rate
- South Africa imports essential items required for the economy and country to function. Think about South Africa and crude oil. We do not produce crude oil. Thus it has to be imported. The weaker the exchange rate the more we pay for this essential item we import.
So our theory is the stronger the Rand, the cheaper the essentials we import, such as crude oil. And the savings in our cheaper imports, offsets potential losses in exports due to the stronger Rand.