Investigating South Africa’s exposure to potential currency crises.

Abstract

This study investigates South Africa's potential exposure to currency crises, aiming to identify effective economic indicators for anticipating such crises. Using annual data from 1994 to 2020, a probit model analysis and the Market Turbulence Index (MTI) are employed to facilitate this investigation. The results suggest that none of the 10 variables identified in empirical literature have predictive power in the South African context. The insignificant findings can be attributed to data frequency restrictions, as annual data was used instead of daily, weekly, or monthly data due to limited public access to monthly statistics. The study concludes that the modelling approach employed may not be helpful for policymakers and central banks in predicting currency crises in South Africa. However, the use of higher frequency data and additional variables, such as political instability, may improve the significance and predictability of currency crises. Despite the insignificant results, the study highlights the potential adoption of the MTI in identifying crisis thresholds. With higher frequency data and more influential variables, this study can contribute significantly to the literature, particularly in a country like South Africa with a volatile economic climate.