A new model of “news chatter” to measure South Africa’s economic policy uncertainty has been revealed in a working paper published by the International Monetary Fund (IMF) this week.
Graph 1: How policy uncertainty correlates with recession and currency crisis in SA
Spikes in policy uncertainty do not always coincide with economic turmoil, particularly in the more recent period, the researchers explained. Source: IMF working paper.
The research by Sandile Hlatshwayo and Magnus Saxegaard explains how high domestic policy uncertainty reduces the responsiveness of exports to price changes by increasing the option value of firms adopting a “wait-and-see” approach when it comes to making fixed-cost investments.
“For example, uncertainty over how a firm’s assets will be taxed might lead that firm to halt expansion or capital investment until that uncertainty is resolved, even in the face of high and rising demand for its products,” the paper explains.
Graph 2: Annual averages of the quarterly measure of policy uncertainty in SA
“Economic policy uncertainty worsened during the transition to democracy, however economic policy uncertainty reached maximal levels in the late 2000s in response to external shocks, an energy crisis, and investment regulation uncertainty,” the researchers explained. Source: IMF working paper.
“As opposed to other forms of uncertainty shocks (e.g. natural disasters, terrorist attacks, and external shocks), policy uncertainty is unique in that it can be proactively managed, if not altogether avoided,” the authors said.
“Unlike more traditional outcome measures of uncertainty in an economy (e.g. strike days or currency volatility), ‘news chatter’ uncertainty indices also pick up the threat or anticipation of volatility, whether or not it comes to fruition.”
Graph 3: Annual averages of the quarterly measure of political uncertainty
Political uncertainty was high around the democratic transition period and during the 2008 ANC Mbeki/Zuma factional split. Source: IMF working paper.
After constructing the “news chatter” measure – sourced from media – of South African economic policy uncertainty, the researchers found that increased policy uncertainty diminished the responsiveness of exports to relative price changes.
Graph 4: Annual averages of the quarterly measure of energy/electricity uncertainty
Load shedding in 2008, news that Medupi and Kusile were behind schedule in 2012 and load shedding in 2014/15 shows the effects it had on economic uncertainty. Source: IMF working paper.
In recent years, the link between the real effective exchange rate (REER) and exports in South Africa has weakened, the authors explained. “While exports still rise in response to REER depreciations, the REER-export elasticity is below historical estimates.
“We find that increased policy uncertainty diminishes the responsiveness of exports to the REER and has short and long-run level effects on export performance.
“We show that a measure of competitiveness that adjusts for uncertainty and supply-side constraints greatly outperforms the REER in tracking exports performance.”
Graph 5: Annual averages of the quarterly measure of mining uncertainty
The above graph shows how the Marikana massacre in 2012 impacted economic uncertainty. Source: IMF working paper.
The research is a work in progress and should not be associated as the IMF’s view, it cautioned.