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Exchange rate risk and sovereign debt risk in South Africa: A Regime Dependent Approach

Author

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  • Mathias Manguzvane

    (College of Business and Economics, School of Economics, University of Johannesburg)

  • Mduduzi Biyase

    (College of Business and Economics, School of Economics, University of Johannesburg)

Abstract

We provide novel evidence of the regime specific effect of exchange rate risk on sovereign debt risk in South Africa. Using monthly data from 2008 to 2021 through a Markov regime switching model with time varying probabilities for the transitions, our results show that exchange rate risk matters in determining movements in sovereign debt risk as measured by sovereign credit default swaps (CDS). The results suggest that exchange rate risk exacts a positive and significant impact on sovereign debt risk in both the high risk regime and low risk regime. However, we notice that the magnitude of the impact differs from one regime to the other, implying that sovereign debt risk responds differently to exchange rate risk bull and bear markets

Suggested Citation

  • Mathias Manguzvane & Mduduzi Biyase, 2023. "Exchange rate risk and sovereign debt risk in South Africa: A Regime Dependent Approach," Economics Working Papers edwrg-04-2023, College of Business and Economics, University of Johannesburg, South Africa, revised 2023.
    • Handle: RePEc:ady:wpaper:edwrg-04-2023
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    More about this item

    Keywords

    Sovereign debt; Exchange rate; Markov Regime Switching Model; credit default swaps;
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