Modelling the effects of changes in the exchange rate, oil price and real wages on the trade balance in South Africa

Trade, which includes exports and imports, is one of the main engines of economic growth for both developed and developing countries. International trade is however affected and influenced by many factors, such as the exchange rate, commodity prices, production factors, etc. The purpose of this study was to analyse the responsiveness and relationship between the trade balance and factors such as the oil price, the exchange rate and real wage shocks. The study employed quarterly data covering the period from the first quarter of 1994 to the fourth quarter of 2018. The study adopted various statistical and econometric approaches and these approaches included an autoregressive distributed lag (ARDL) model, an error correction model and the Toda-Yamamoto causality test. The results from the ARDL model suggested long-run cointegration amongst the variables. The regression analysis revealed that all explanatory variables negatively impact on the trade balance. However, the magnitude of their effects differs from one variable to the other. Comparing all independent variables, the exchange rate was found to have the strongest long-term effect on the trade balance compared to the effect of both crude oil price and real wages. Interestingly, the error correction model (ECM) results indicated that the exchange rate can positively affect the trade balance. Additionally, the Toda-Yamamoto results demonstrated that both the exchange rate and oil price shocks can assist in forecasting trade balance fluctuations in the short-term. Based on these findings, and since South Africa has no control over the oil price, it is imperative that the South African Reserve Bank implement strategies that may stabilise the exchange rate, in an attempt to increase opportunities that facilitate a positive trade balance, which is required for economic growth.