The growth performance of the South African economy over the past two and a half decades has been disappointing. The economy has not reached the high growth rates of the 1960s, which is desperately needed to alleviate poverty in the country. While the sources of growth have been a subject of much debate, recently the notion that the Real Exchange Rate (RER) level of a country matters for growth has attracted attention. While it is generally expected that the value of the currency should not remain constant and that the exchange rate fluctuates over time, in the long-term, it is expected to converge to an equilibrium level South Africa follows an inflation targeting framework and a free floating exchange rate regime. The exchange rate has been highly volatile since the abolishment of the dual exchange rate system in 1995. This implies that there were periods of overvaluation and undervaluation from the equilibrium level; in other words the rand experienced times of misalignment. In the event of misalignments, the RER is moved to levels which make it difficult for an economy to sustain international competitiveness over the long-run, and this is harmful to growth rates in the economy. This is especially true for countries, such as South Africa, which is heavily dependent on exports. The RER is therefore very powerful and has been argued to be the cause of loss of competitiveness and growth slowdowns. This study investigates this notion for South Africa. The main aim of this study is therefore to investigate the effects of RER misalignment on economic growth in South Africa. This implies that the study aims to determine the level of RER equilibrium, the misalignment in the real value of the rand, and how this misalignment has affected economic growth in the country. The Behavioural Equilibrium Exchange Rate (BEER) approach is followed to determine the Equilibrium Exchange Rate (EER), which allows for the use of fundamental macroeconomic variables to determine the real equilibrium level of the rand. Identified fundamental variables, which are the main drivers of the current RER in South Africa, include GDP per capita, trade openness, terms of trade, gross fixed capital formation and the real interest rate differential. A Vector Error-Correction Mechanism (VECM) is used in the estimation of the Real Equilibrium Exchange Rate (REER). Misalignment is calculated as the difference between the actual and the equilibrium real exchange rate. It is found that during the period under investigation (1985 to 2011) there have been substantial misalignments in the RER of the rand, though the currency was mostly overvalued. It is also shown that the rand does revert to its equilibrium level over time. The least square method is used to determine the effect of this RER misalignment on economic growth. Additional variables such as the initial level of GDP per capita, trade openness, terms of trade as well as gross fixed capital formation, are included in the growth specification. Trade reforms emphasise the importance of export-led growth in a commodity-rich economy, such as South Africa. The results indicate that the RER misalignment has a positive coefficient; this implies that a misalignment in the rand has not necessarily been harmful to economic growth. Therefore, it can be concluded that in the case of South Africa, misalignment is generally stimulating growth, but more so when the currency is undervalued. The results therefore show that the RER should be kept at competitive levels in order to boost economic growth in the country. The results also show support for the strategy of export-led growth in South Africa. / Thesis (MCom (Economics))--North-West University, Potchefstroom Campus, 2013.

The growth performance of the South African economy over the past two and a half decades has been disappointing. The economy has not reached the high growth rates of the 1960s, which is desperately needed to alleviate poverty in the country. While the sources of growth have been a subject of much debate, recently the notion that the Real Exchange Rate (RER) level of a country matters for growth has attracted attention. While it is generally expected that the value of the currency should not remain constant and that the exchange rate fluctuates over time, in the long-term, it is expected to converge to an equilibrium level South Africa follows an inflation targeting framework and a free floating exchange rate regime. The exchange rate has been highly volatile since the abolishment of the dual exchange rate system in 1995. This implies that there were periods of overvaluation and undervaluation from the equilibrium level; in other words the rand experienced times of misalignment. In the event of misalignments, the RER is moved to levels which make it difficult for an economy to sustain international competitiveness over the long-run, and this is harmful to growth rates in the economy. This is especially true for countries, such as South Africa, which is heavily dependent on exports. The RER is therefore very powerful and has been argued to be the cause of loss of competitiveness and growth slowdowns. This study investigates this notion for South Africa. The main aim of this study is therefore to investigate the effects of RER misalignment on economic growth in South Africa. This implies that the study aims to determine the level of RER equilibrium, the misalignment in the real value of the rand, and how this misalignment has affected economic growth in the country. The Behavioural Equilibrium Exchange Rate (BEER) approach is followed to determine the Equilibrium Exchange Rate (EER), which allows for the use of fundamental macroeconomic variables to determine the real equilibrium level of the rand. Identified fundamental variables, which are the main drivers of the current RER in South Africa, include GDP per capita, trade openness, terms of trade, gross fixed capital formation and the real interest rate differential. A Vector Error-Correction Mechanism (VECM) is used in the estimation of the Real Equilibrium Exchange Rate (REER). Misalignment is calculated as the difference between the actual and the equilibrium real exchange rate. It is found that during the period under investigation (1985 to 2011) there have been substantial misalignments in the RER of the rand, though the currency was mostly overvalued. It is also shown that the rand does revert to its equilibrium level over time. The least square method is used to determine the effect of this RER misalignment on economic growth. Additional variables such as the initial level of GDP per capita, trade openness, terms of trade as well as gross fixed capital formation, are included in the growth specification. Trade reforms emphasise the importance of export-led growth in a commodity-rich economy, such as South Africa. The results indicate that the RER misalignment has a positive coefficient; this implies that a misalignment in the rand has not necessarily been harmful to economic growth. Therefore, it can be concluded that in the case of South Africa, misalignment is generally stimulating growth, but more so when the currency is undervalued. The results therefore show that the RER should be kept at competitive levels in order to boost economic growth in the country. The results also show support for the strategy of export-led growth in South Africa. / Thesis (MCom (Economics))--North-West University, Potchefstroom Campus, 2013.

The inability to effectively hedge against unfavourable exchange rate movements, using the current forward exchange rate as the only guideline, is a key inhibiting factor of international trade. Market participants use the current forward exchange rate quoted in the market to make decisions regarding future exchange rate changes. However, the current forward exchange rate is not solely determined by the interaction of demand and supply, but is also a mechanistic estimation, which is based on the current spot exchange rate and the carry cost of the transaction. Results of various studies, including this study, demonstrated that the current forward exchange rate differs substantially from the realized future spot exchange rate. This phenomenon is known as the exchange rate puzzle. This study contributes to the dynamics of modelling exchange rate theories by developing an exchange rate model that has the ability to explain the realized future spot exchange rate and the exchange rate puzzle. The exchange rate model is based only on current (time t) economic fundamentals and includes an alternative approach of incorporating the impact of the interaction of two international financial markets into the model. This study derived a unique exchange rate model, which proves that the exchange rate puzzle is a pseudo problem. The pseudo problem is based on the generally excepted fallacy that current non–stationary, level time series data cannot be used to model exchange rate theories, because of the incorrect assumption that all the available econometric methods yield statistically insignificant results due to spurious regressions. Empirical evidence conclusively shows that using non–stationary, level time series data of current economic fundamentals can statistically significantly explain the realized future spot exchange rate and, therefore, that the exchange rate puzzle can be solved. This model will give market participants in the foreign exchange market a better indication of expected future exchange rates, which will considerably reduce the dependence on the mechanistically derived forward points. The newly derived exchange rate model will also have an influence on the demand and supply of forward exchange, resulting in forward points that are a more accurate prediction of the realized future exchange rate. / Thesis (Ph.D. (Risk management))--North-West University, Potchefstroom Campus, 2011.

The inability to effectively hedge against unfavourable exchange rate movements, using the current forward exchange rate as the only guideline, is a key inhibiting factor of international trade. Market participants use the current forward exchange rate quoted in the market to make decisions regarding future exchange rate changes. However, the current forward exchange rate is not solely determined by the interaction of demand and supply, but is also a mechanistic estimation, which is based on the current spot exchange rate and the carry cost of the transaction. Results of various studies, including this study, demonstrated that the current forward exchange rate differs substantially from the realized future spot exchange rate. This phenomenon is known as the exchange rate puzzle. This study contributes to the dynamics of modelling exchange rate theories by developing an exchange rate model that has the ability to explain the realized future spot exchange rate and the exchange rate puzzle. The exchange rate model is based only on current (time t) economic fundamentals and includes an alternative approach of incorporating the impact of the interaction of two international financial markets into the model. This study derived a unique exchange rate model, which proves that the exchange rate puzzle is a pseudo problem. The pseudo problem is based on the generally excepted fallacy that current non–stationary, level time series data cannot be used to model exchange rate theories, because of the incorrect assumption that all the available econometric methods yield statistically insignificant results due to spurious regressions. Empirical evidence conclusively shows that using non–stationary, level time series data of current economic fundamentals can statistically significantly explain the realized future spot exchange rate and, therefore, that the exchange rate puzzle can be solved. This model will give market participants in the foreign exchange market a better indication of expected future exchange rates, which will considerably reduce the dependence on the mechanistically derived forward points. The newly derived exchange rate model will also have an influence on the demand and supply of forward exchange, resulting in forward points that are a more accurate prediction of the realized future exchange rate. / Thesis (Ph.D. (Risk management))--North-West University, Potchefstroom Campus, 2011.