Macroeconomic and Financial Responses to Weather Shocks: The Case of South Africa

This paper examines South Africa's vulnerability to drought shocks, focusing on how droughts and irregular rainfall affect macroeconomic and financial variables. Using a structural vector autoregression (SVAR) model with data from 1995 to 2019, the study employs the Standardized Precipitation Evapotranspiration Index (SPEI) to measure the impact of weather shocks. This ap- proach captures the effects of weather anomalies on key financial variables, such as credit availability and inflation, and broader macroeconomic variables, such as sectoral output. Despite agriculture's limited GDP contribution, its vulnerability to climate variability plays a critical role in macroeconomic stability. The findings indicate that drought shocks are associated with sizeable macroeconomic and financial responses in South Africa. Agricultural output declines during droughts, whereas aggregate GDP and GDP-­ deflator inflation also fall and credit contracts. The financial sector faces credit contractions following weather shocks, exacerbating financial stress and weakening economic adjustment. These results highlight the critical need for proactive policies to manage climate risk and integrate it into financial stability frameworks.