Revisiting the Exchange Rate -Oil Price Nexus in Turbulent Period: What Can We Learn From Nigeria and South Africa During Covid-19?

The debate on the exchange rate –oil price nexus usually rests on the fact that oil price is quoted in US dollar (USD) and therefore, fluctuations in oil price may affect the exchange rate behavior of trading nations through the USD. However, it might be inaccurate to generalize the dynamic of the nexus for both net oil-exporting and net oil-importing economies particularly when exchange rates in these economies are running under floating regime. As a result, we revisit the dynamics of returns and volatility spillovers between exchange rates and oil prices in the turbulent period of COVID-19 from the perspective of the oil-exporting/oil-importing dichotomy, using the cases of Nigeria and South Africa. According to the results of the various pre-estimation tests, we find the VARMA-DCC-GARCH model to be the best fit for modelling the interdependence of exchange rates and oil prices in the investigated economies. Empirically, we show that regardless of the oil-exporting or oil-importing peculiarity of an economy, unanticipated events in exchange rates and oil prices in the current period have the potential to fuel volatility in their returns in the preceding period. Also, not only is the magnitude and direction of the spillovers different under the different waves of COVID- 19 but also sensitive to whether an economy is oil-exporting or oil-importing. Thus, while South Africa and Nigeria are among the top 5 African countries with the highest incidences of COVID-19, the permanency or transitory dynamics of the shocks to exchange rates and oil prices during the COVID-19 pandemic appears to be sensitive to whether an economy is oil-exporting or oil-importing. It is in view of this, among other things, that we herein infer that while the immediate policy response to an exogenous shock such as COVID-19 may be global and general for all countries, as is the case with the lockdown initiative, the long-run efforts at recovering from the shock may require that the peculiarities of the individual economies be taken into consideration, as is obvious from the findings of this study.