Current Account Sustainability of South Africa with Regime Shifts

Abstract

Purpose This study investigates the sustainability of current account with possible regime shifts in South Africa. Design/methodology/approach The study makes use of an annual data spanning from 1980 to 2021, the data is collected from International monetary fund. To ensure the order of integration of variables, the study used Fourier LM unit root test and Minimum LM unit root test. The study uses maki cointegration test with multiple structural breaks to examine the long run relationship between the variables in the presence of structural breaks. Findings Maki cointegration test confirmed a long run relationship between exports and imports of goods and services. The results indicate that the current account sustainability of South Africa is weakly. Research limitations/implications This study did not consider the effect of nonlinearities in the modelling processes. Another drawback of this study is that it did not use frequency analysis such as wavelet /Fourier transform since the current account can be affected by volatilities in the domestic and global markets. Therefore, for future studies it will be better if they overcome the limitations of this study. Originality/value This study focuses specifically on the issue of current account sustainability, taking into consideration the possible consequences of structural changes brought about by South Africa's prior economic crises. In addition, this study recommends the devaluation of currency for South Africa to ensure that the exports always exceed imports or the improvement in the current account deficit.