Abstract
Is there a balance sheet channel transmitting negative shocks to mining commodity prices and exchange rate depreciations into the mining sector investment, foreign debt and intermediate imports? Evidence in this chapter indicates that mining investment declines and remains depressed in response to a real exchange rate depreciation shock. The real exchange rate depreciation shocks are transmitted more via the balance sheet items of foreign debt and the importation of intermediate goods which are largely representative of inputs to the production process and investment. Are the responses of investment, foreign debt and intermediate imports different to a decline in mining commodity prices? We find that investment growth and foreign debt are more responsive to a decline in commodity prices. The results affirm the centrality of the balance sheet channel in transmitting negative shocks to commodity prices demand for mining commodities and exchange rate depreciation shocks.
Is an investment-led strategy superior in the mining sector? Yes, evidence in this chapter shows that investment growth is a necessary but insufficient condition. Commodity prices are an important part of a thriving mining sector. A concurrence of an increase in commodity prices and demand for mining exports augers well for mining investment growth. In particular, we find that persistent shocks, especially of positive shocks to commodity prices, lead to persistently higher levels of mining investment as opposed to non-persistent shocks. The interaction of the exchange rate dynamics and balance sheet effects drive the business cycle in the mining sector. In turn, these are highly complemented and propagated by commodity price cycles and how persistent they are.
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Notes
- 1.
The contractionary effects of large real exchange rate depreciation can occur due to the cost of inputs and foreign currency-denominated debt resulting in foreign currency mismatches on balance sheets of firms.
- 2.
It can even exert negative effects.
- 3.
Nonetheless, studies show that if firms were perfectly hedged, currency depreciations should not have any relevant negative balance sheet consequences.
- 4.
Serena and Sousa (2018) use the country-specific bilateral exchange rates to the US dollar and focus mainly on exchange rate depreciations.
- 5.
The HLM effect suggests that an exogenous increase in terms-of-trade leads to an improvement in the country’s trade balance if the marginal propensity to consume is lower than one.
- 6.
This approach predicts that the adjustment of the current account to a positive shock to terms-of-trade will differ, depending on whether agents perceive it to be persistent or transitory. If perceived to be transitory, rational economic agents will save the bulk of the temporary income gains. However, if agents perceive the shock to be permanent, income gains will almost immediately and entirely be spent. Hence, at any given point, the trade account adjustment will reflect either the dominance of the consumption smoothing effect over the investment effect or vice versa (Kent and Cashin 2003).
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Appendix
Appendix
Mining investment as a ratio of nominal GDP, aggregate and private sector investment (1960Q1 to 2018Q4). (Source: South African Reserve Bank and authors’ calculations)
Responses to R/US$ depreciation. (Note: The grey shaded area bands denote the 16th and 84th percentile confidence bands. Source: Authors’ calculations)
Mining investment responses to foreign debt and intermediate imports in model with R/US$. (Note: The grey shaded area bands denote the 16th and 84th percentile confidence bands. Source: Authors’ calculations)
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Gumata, N., Ndou, E. (2019). The Role of the Exchange Rate on Investment Growth in the Mining Sector: Evidence from the Balance Sheet Hypothesis. In: Accelerated Land Reform, Mining, Growth, Unemployment and Inequality in South Africa. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-30884-1_14
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DOI: https://doi.org/10.1007/978-3-030-30884-1_14
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