Global Growth and Financial Spillovers and the South African Macro-economy

203 Pages·2016·5.08 MB·English

by  Mthuli Ncube

Global Growth and Financial Spillovers and the
South African Macro-economy

Global Growth and
Financial Spillovers
and the South African
Macro-economy
Mthuli Ncube
Professor of Public Policy, Blavatnik School of Government, University of Oxford
Nombulelo Gumata
Economist, South African Reserve Bank
and
Eliphas Ndou
Economist, South African Reserve Bank and Lecturer,
University of the Witwatersrand, South Africa
© Mthuli Ncube, Nombulelo Gumata and Eliphas Ndou 2016
Softcover reprint of the hardcover 1st edition 2016 978-1-137-51295-6
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First published 2016 by
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ISBN 978-1-349-56189-6 ISBN 978-1-137-51296-3 (eBook)
DOI 10.1057/9781137512963
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Contents
List of Figures xi
List of Tables xvii
Preface xviii
Acknowledgements xxi
1 Introduction 1
1.1 Stylised facts 2
1 .1.1 W hat happens to the exchange rate and asset
prices at peak and low levels of global risk
aversion? 2
1.2 Do foreign and South African asset prices move
together? 4
1.3 T he relationship between G7 economic growth and
South African growth 5
1.4 C orrelation between South African trade variables
and G7 economic growth 6
1.5 Are South Africa’s export shares following global
economic growth dynamics? 8
Part I Growth Spillover Effects
2 Positive Economic Growth Spillovers of G8 Countries
into South Africa 13
2.1 I ntroduction 1 3
2.2 Recent growth spillovers evidence 1 7
2 .2.1 Evidence on the regional sources of growth
spillovers 17
2 .2.2 Evidence of various channels of transmission 1 8
2.3 Brief discussions of various economic linkages 18
2 .3.1 T rade patterns 18
2 .3.2 Foreign inward and outward investment 2 1
2 .3.3 T he real effective exchange rate movements
and implications for competitiveness 2 1
v
vi Contents
2.4 The methodology 2 2
2 .4.1 The modified Poirson and Weber growth
spillover framework 22
2.5 The empirical analysis 2 3
2 .5.1 H ow does South African economic growth respond
to positive GDP shocks from G8 countries? 2 3
2 .5.2 E volution of South African growth before,
during and after the recession in 2009Q1–Q3? 2 5
2 .5.3 T he role of different transmission channels 2 8
2 .5.4 To what extent are US growth shocks
transmitted via third countries? 3 0
2.6 Conclusion 3 1
3 Growth Spillovers from BRIC Countries into South Africa 3 3
3.1 I ntroduction 3 3
3.2 D issecting the role of China on South African
trade dynamics 3 6
3 .2.1 The South African exports to China 3 7
3 .2.2 T he South African imports from China 3 7
3.3 The methodology 3 8
3.4 T he data 3 9
3 .5 E mpirical results 4 0
3.5.1 H ow did BRIC countries contribute to South
African GDP growth during the recession in
2009Q1–Q3 and beyond? 41
3 .5.2 T he role of different transmission channels 4 3
3 .5.2.1 The counterfactual analysis of various
channels and third country effects 4 4
3.6 Conclusion 4 8
Appendix A3 48
O rdering sequence 4 8
Part II Spillovers of Foreign Financial Shocks
4 The Spillovers of Financial Shocks from the United
States into the South African Economy 51
4.1 Introduction 5 1
4 .1.1 T he relationship between US and SA financial
variables 52
4 .1.2 The relationship between US trade with SA 5 4
4.2 Recent studies 5 6
Contents vii
4.3 VAR methodology 5 7
4.4 The results 5 9
4.5 Discussion of the results 59
4 .5.1 R obustness analysis: does the sample size alter
the responses? 60
4 .5.2 H istorical contributions 6 2
4.6 Conclusion 6 3
Appendix A4 65
Appendix B4 66
5 Spillovers from Euro Area Bond Yields into the South
African Macro Economy 6 7
5.1 Introduction 6 7
5.2 Stylised facts on trade relations between South Africa
and the euro area 68
5.3 A brief review of the portfolio balance model of the
exchange rate determination 71
5.4 V AR methodology and the data 7 2
5.5 F indings 7 4
5 .5.1 R esponses to an unexpected positive euro area
bond yield shock 74
5.6 What are the effects of selected unexpected positive
euro area bond yields shocks? 7 6
5.6.1 Does the inclusion of the period of global
uncertainty between 2008 and 2011 affect the
results? 76
5 .6.2 T he counterfactual analysis using extended
sample data 77
5.7 C onclusion 7 9
Appendix A5 80
Part III Capital Flow Effects and the Trade Balance
6 Capital Inflows and Asset Prices in South Africa 8 3
6.1 Introduction 8 3
6.2 Stylised relationships during the inflation targeting
period 8 4
6.3 Recent studies 8 8
6.4 VAR methodology 8 8
6.5 D ata 8 9
6.6 W hat are the initial responses of variables on impact? 89
6 .6.1 Empirical results 89
viii Contents
6 .6.2 Counterfactual analysis of the role of shocks
from capital inflows 91
6 .6.3 Did the capital inflow shock impact imports
and exports? 93
6 .6.4 The effects of capital inflows shocks on financial
vulnerability indicators 9 5
6 .6.5 Capital inflows and credit growth 95
6 .6.6 T obin’s q of residential property and capital
inflows 96
6.7 Conclusion 9 9
Appendix A6 100
7 The Effects of Portfolio Inflow and Outflow on the
Economy 101
7.1 I ntroduction 1 01
7.2 Do net portfolio flows increase asset prices returns? 103
7 .2.1 H ow do net portfolio inflows impact the
exchange rate? 104
7 .2.2 R elationship between portfolio flows and
economic growth 105
7.3 VAR methodology 1 05
7.4 Results 1 06
7 .4.1 W hat are the effects of a positive inflation
shock on various capital inflows and outflows? 1 06
7.4.2 Are outflows or inflows more responsive to an
inflationary shock? 1 07
7 .4.3 What are the effects of a contractionary
monetary policy shock on capital flows? 1 07
7 .4.4 What are the effects of positive portfolio
outflow shocks? 109
7 .4.5 What is the impact of positive portfolio inflow
and other forms of capital inflow shocks? 1 10
7.5 Counterfactual analysis of the role of portfolio flows 110
7 .5.1 C ontributions of portfolio flows and domestic
factors on asset prices 111
7 .5.2 P ortfolio flows versus asset price and domestic
factors: counterfactual economic growth analysis 1 12
7.6 A n unexpected positive interest rate differential shock
on portfolio flows dynamics 1 13
7.7 Conclusion 1 14
Appendix A7 115
Contents ix
8 Investment Flows and Exchange Rate Effects on the
Trade Balance 116
8.1 Introduction 1 16
8.2 Further trend analysis 1 18
8.3 Theoretical linkages 120
8.4 VAR methodology 1 21
8.5 F indings 1 22
8 .5.1 Does the evidence change when we add more
shocks? 125
8 .5.2 Which components of the trade balance
transmit the shocks? 1 26
8.6 T he historical and variance decompositions 127
8.7 C onclusion 128
Appendix A8 129
Part IV Equity Markets Interdependence
and Financial Stress
9 Interdependence in Emerging Economies:
The Case of Equity Markets 133
9.1 Introduction 1 33
9.2 The multivariate VAR–EGARCH model 134
9 .2.1 The mean equation 1 34
9 .2.2 T he variance equation 1 34
9 .2.3 C ovariance relationship 1 35
9 .2.4 S ummary of the relationships 1 35
9.3 Data and descriptive statistics 136
9.4 Results: conditional mean results 136
9 .4.1 Asymmetric transmission based on the
conditional variance 138
9 .4.2 How vulnerable is South Africa’s economic
growth to an unexpected positive stock price
returns and volatility shocks? 1 39
9 .4.3 A re there any differential effects between
stock returns and volatility on economic
growth? 141
9 .4.4 T o what extent do stock price dynamics differ
from other shocks? 1 42
9 .4.5 D o stock price returns and volatility transmit
portfolio outflow shocks into the economy? 1 44