Oil price uncertainty and savings in South Africa

• DOI: http://doi.org/10.1111/opec.12049
• Date: 01 September 2015
• Author: Diksha Dave,Goodness C. Aye
• Published date: 01 September 2015

Oil price uncertainty and savings in

South Africa

Diksha Dave* and Goodness C. Aye**

*Postgraduate Student, Department of Economics, University of Pretoria, Pretoria 0002, South Africa.

**Senior Researcher, Department of Economics, University of Pretoria, Pretoria 0002, South Africa.

Email: goodness.aye@gmail.com

Abstract

Oil prices have become increasingly important to determine indicators such as inflation; this in

turn affects savings and investments. This paper investigates the impact of the volatility of oil

prices on savings in South Africa using quarterly data covering the period 1960–2014. The study

used the GARCH-in-mean VARmodel. This model also provides a way of examining the effect of

a negative and positive shock in oil prices on savings.The outcome of this study proves that oil

price uncertainty which is measured as the conditional standard deviation of a one-step-ahead

forecast error of the change in oil price affects South Africa’s savings in a negative way. The

responses of savings to a positive and negative oil price shocks are symmetric in both direction

and magnitude.

1. Introduction

The literature has suggested that if a country has sustained high levels of savings, it will

lead to sustained economic growth. For instance, Al-Khouri and Dhade (2014) investi-

gates the links between oil price changes, national savings,legal and institutional develop-

ment, and economic growth. The results showed that there was a non-linear and concave

relationship between economic growth and saving rates. This implies that if economic

growth is low, an increase in savings would significantlyincrease economic g rowth.Once

the country shows a significant increase in growth, an increase in savings would only

create little economic growth. They have assumed the reason for this was due to the

absence of absorption capacity to keep investments low but savingshigh.

The abovefinding is also consistent with theor y from models such as the Solow(1956)

model. Therefore, savings and investments are necessary for growth in a country. South

Africa in particular has had a problem in terms of not having enough savings for growth,

not forgetting the low business confidence due to political and labour issues recently. Of

course savings is not the onlycomponent that will help, but it would have a significant con-

tribution towardseconomic g rowthand mostly investments. The purchasing powerof both

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