South African Exporters and the Pricing-to-Market Strategy

Abstract

This chapter assesses whether South African exporting firms practise the pricing-to-market (PTM) behaviour. Evidence indicates that exporters practise the PTM strategy to stabilise the effects of the exchange rate fluctuations on their exports. This is especially the case when the exchange rate appreciates relative to when it depreciates. Exporters adjust their profit margins and allow a small pass-through of the exchange rate changes into changes in export prices. A PTM coefficient of −0.52 percent is estimated for the period 2000–2012 implying that exporters reduce their profit markup by 5.2 percent and raise their selling price abroad by 4.8 percent following a 10 percent appreciation in the Rand exchange rate relative to trading partners. The appreciation in the exporters currency implies that the price paid using the importers currency will increase by 5.2 percent rather than a full 10 percent if there is complete exchange rate pass-through. A lack of the complete pass-through of the exchange rate is also observed during depreciations. Such practices imply that the stimulating abilities of a weaker currency as indicated by international economics theory may fail to spur exports growth contrary to expectations. Such tendencies by exporters tend to counter the effect of exchange rate fluctuations.