Abstract
M.Com.
The objective of this study was to compose an effective exchange rate index for the
motor- and related industries in Soutb Africa to be used for the forecasting of new
motorcar prices.
The situation in South Africa, where a lot of components used in the production of
motorcars are imported, exposes the industry to exchange rate risk. The government
introduced measures like Phase VI of the local content program and a 100 percent Ad
Valorem import duty on new motorcars to protect local manufacturers. Although these
measures limits exchange rate exposure, the motor industry is still affected by exchange
rate changes.
An effective exchange rate index was compiled by allocating weights to a currency index
according to it's contnbution to imports by the local motor industry.
The private consumer of motorcars can use the index to determine when he must
purchase a new vehicle to avoid price increases. Corporate consumers of motor vehicles can use the index to help with the management of their vehicle fleet.
The index can also be used by motorcar manufacturers and importers of components to
manage their exchange rate risk. Individual motorcar manufacturers can test the
effectiveness of their strategies to manage exchange rate risk by comparing it to the
index as the effective exchange rate index was compiled for the industry as a whole. The
exposure of a manufacturer with an effective strategy will be less than that of the index.
A manufacturer will have to look at alternative strategies to managing exchange rate risk
if his exposure to exchange rate risk is greater than that of the index.
Regression analysis was used with the exchange rate index as the independent variable
to forecast prices of new motorcars. A high degree of correlation was found when the
forecasted prices were compared with the actual prices of new motorcars.
The conclusion was reached that the effective exchange rate index could be of great
value to the private- and corporate consumer of new motor vehicles as well as
manufacturers of motorcars and importers of components.