| Summary: | Wits business school in partial fulfilment of the requirements for the degree of Doctor of Philosophy in Finance === Volatility in international commodity prices is almost accepted as a stylised fact in modern
financial markets. The drivers of commodity prices have evolved in addition to traditional
global demand and supply factors. The literature suggests a number of other drivers, among
them, activities of speculators – the so called “financialisation” of commodities postulate, the
role of China and Fed policy. The question of whether exogenous shocks to commodity
prices are transmitted through financial markets in Africa is investigated. In addition, the
hypothesis of “wealth-transfer” from exporters to importers of commodities when prices fall
is tested. Further, commodity prices are tested for their in sample and out of sample
predictive ability. Finally recommendations are made for policy makers and financial market
players in frontier markets in Africa.
The three essays are organised in Chapters 3 to 5 of the study. In Chapter 3, an ARDL bounds
testing approach is adopted and we find that a South Africa-specific commodity index
significantly predicts (in-sample) the exchange rate in the short-run. While the long-run
relationship is weak and the associated error correction process is slow existence of
cointegration of commodity prices and the exchange rate suggests that commodities explain a
significant part of terms of trade fluctuations for South Africa. With respect to the structural
exchange rate models of the South African Rand, using the Dynamic Ordinary Least squares
(DOLS) estimator, we find that commodity prices are significant and consistent explanatory
variables of the changes in the nominal exchange rate. The commodity price variable
improves the in-sample fit of the structural exchange rate models presented in this chapter
and this evidence is robust to the other major Rand cross rates. Further, inclusion of the
commodity price variable improves the out-of-sample short horizon forecasting ability of
canonical exchange rate models.
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In Chapter 4 we employ dynamic econometric modelling techniques to confirm the existence
of a strong financial channel through which copper price shocks are transmitted to the
Zambian economy. In the short run, changes in the copper price lead changes in all financial
market variables. Financial market variables and the price of copper share a long-run
equilibrium relationship. Importantly, if this system is out of its long-run equilibrium, short
run corrections back to equilibrium are made by adjustments to the short term interest rate.
Fittingly, the copper price-interest rate relationship appears strong in the long run. This result
suggests that the policy makers “over-rely” on monetary policy to accommodate shocks from
the international price of copper. The exchange rate and equity prices appear weakly
exogenous to the system in-sample and out of sample.
In Chapter 5, we confirm existence of a structural break in the price of oil in July 2008. We
also show that the financial market time series for Kenya and Nigeria also exhibit a
significant structural break around this period. We therefore partitioned our sample to
investigate the effect of structural shocks to the financial markets of the two markets. On the
whole, we find that the nexus between financial markets and oil prices is much stronger and
statistically significant for an oil exporter (Nigeria) and weaker and statistically insignificant
for a net oil importer (Kenya) after the 2008 financial crisis. Prior to the 2008 oil price shock,
the results are roughly the opposite of the post oil shock period for both countries. Our results
highlight that it is important to account for major structural shifts in modelling the impact of
oil prices in developing countries (Le and Chang, 2011). The “wealth transfer” argument
from net importer to net-exporters exists between Kenya and Nigeria in the short run
although it is not robust to sample specification. Finally, we highlight the inherent flaws and
limitations of ex-post stabilisation funds in Africa and make a case for market based oil-price
hedging instruments. We argue for the adoption of market based hedging instruments given
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the promising growth in financial markets of developing African countries in spite of several
thorny implementation difficulties. === GR2019
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