The Impact of Exchange Rate Volatility on Foreign Direct Investment and Sovereign Bond Yield in South Africa
Keywords:
Exchange Rate; Foreign Direct Investment; Sovereign Bond Yield; South Africa; Volatility.Abstract
Exchange rates are one of the key factors that influence the macroeconomic performance of a country. The stability or volatility of the exchange rate of a country determines the type of impact it has on the economy of that country. The purpose of this study is not only to contribute to the existing literature by shedding light on the specific impact of exchange rate volatility on FDI and SBY in the South African context using GARCH models but also to empirically establish the relationship that exists between FDI and SBY using VECM to establish their short-run and long-run dynamics. To determine this, time series data of exchange rates, foreign direct investments, sovereign bond yields, inflation, and gross domestic product was collected for the period 1995 to 2022. This period accounts for occurrence of the Rand crisis in 1998, global financial crisis in 2008, and global Covid-19 pandemic in 2020. The GARCH model selected was chosen based on the SBIC information criteria under the student-t distribution. The results of this investigation suggested that exchange rate volatility has a negative impact on FDI but no significant impact on SBY. Engle-Granger tests illustrated that FDI impacts SBY have long-run relationship, meaning any short-run deviation will be corrected in the long-run. The findings further illustrate that FDI has no significant impact on SBY. Furthermore, the findings of this study suggest that there are no leverage effects, meaning that the impact of positive and negative shock are different. The recommendation of the study requires that monetary authorities set policies that would mitigate the exchange rate volatility in order to secure or to attract foreign investments and maintain a stable interest on sovereign bonds (SBY). Therefore, monetary policy maker must ensure to stabilize Rand to US dollar exchange rate by controlling inflation and other economic indicators whilst the government also has to stabilize SBY by selling and buying sovereign (government) bonds to control the yield on it.
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Copyright (c) 2025 Ayanda Shange, Mkhanyiselwa Nkabane, Nomvula Dube, Naledi Ndwalane, Yolanda Jali, Rethabile Nhlapho, Babatunde Lawrence, Fabian Moodley
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