New South African Review 1 - Anthony Butler

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by a rapid decline in net portfolio flows in 2000 which turned sharply negative in 2001 (see figure 6). During this period, inflation increased sharply as a result of the weaker rand. The South African Reserve Bank, which follows an inflation targeting policy, increased interest rates by 4 per cent. Net portfolio capital flows began recovering in 2002 and turned positive in 2003. They grew over the next few years to peak at nearly 8 per cent of GDP. This recovery in portfolio flows was accompanied by rapid reductions in interest rates that contributed to the house price and financial asset bubble from 2003 to 2007.

      Source: Quantec

      In an examination of the period up to 2002, I argue that the surge in portfolio capital flows to South Africa and the related increased extension of credit to the private sector during the 1990s was not associated with increased levels of fixed investment but with increased household consumption, financial speculation and capital flight.

      Figure 6 compares the trends of total fixed capital formation, private business fixed capital formation, total domestic credit extension and total credit extended to the private sector all as percentages of GDP for South Africa for the period 1990 to 2007. Figure 7 shows that credit extension to the private sector increased about 22 per cent from 2000 to 2008 but that private business investment increased by only 5 per cent during that period. What can also be inferred from Figure 7 is that a part of the increase in capital formation from 2006 may not be due to private business capital formation but to state investment in infrastructure. The increase in private capital formation from 2003 to 2008 is due to investments spurred on by increased financial speculation and debt-driven consumption, not long-term investment in productive investment. Long-term productive investments are required to redress the structural industrial weaknesses of the South African economy. I explain the process, which I describe as misallocation of finance, below.

      Source: SARB

      Figure 8 draws on data from the SARB’s flow of funds data to provide a trend of capital formation after depreciation by sector. We see that the foreign sector has very low levels of net fixed investment. Net investment by the South African financial institutions (the banks and insurers) in fixed capital formation turned negative from 2003. Figure 9 shows that there has been a huge increase in corporate business enterprise net investment, from about R30 billion in 1999 to almost R130 billion in 2007. There has also been large growth in government and household net capital formation over that period.

      Figure 9 shows calculations for trends of net acquisitions of financial assets by sector calculated from the SARB flow of funds data. The first stark difference between figure 8 and figure 9 is the scale of the different charts. The Y-axis on figure 8 goes up to R140 billion and that of figure 9 to R450 billion. The next stark difference is that every sector in figure 9, except for general government, had large and increasing net acquisition of financial assets, whereas in figure 8 we noted that it was only government, household and corporate business enterprises that showed large increases in net capital stock. There was rapid growth in acquisition of financial assets in all the financial categories. The other monetary institutions category, which includes the commercial banks, had huge growth in acquisition of financial assets, which nearly tripled from just over R150 billion in 2003 to nearly R430 billion in 2007.

      Source: calculated using SARB data

      Source: calculated from SARB flow of funds data

      Household net capital formation in 2007 at around R30 billion was a fraction of their net acquisitions of financial assets, which more or less doubled to R200 billion in 2007 from about R100 billion in 2005. The trend in acquisition of financial assets by corporate business enterprises increased until the financial crisis (and the dotcom crisis) in 2001 and then declined until 2005. However, it had a sudden surge and by 2007 had grown, from the 2001 peak of about R100 billion, to over R170 billion.

      Figure 10 highlights an important fact about corporate business’ net acquisition of financial assets relative to net fixed capital formation for the period for which we have SARB flow of funds data (1993 to 2007): corporate business enterprise net capital formation (that is, gross capital formation less depreciation) was lower than net capital formation for all years between 1994 and 2007 except for 2004 and 2005. Corporate saving was low for the period and turned negative in 2006–7. Many of the studies of financialisation in the US economy focus on the increasing financialisation of nonfinancial corporations (NFCs). One aspect of this financialisation is the increased share of income and profits of NFCs from involvement in financial markets and investment in financial assets. The flow of funds data on use of capital by corporate business enterprises in South Africa seems to support the notion that there has been financialisation of NFCs in South Africa.

      Source: calculated from SARB flow of funds data

      A number of recent studies show that financialisation of nonfinancial corporations was associated with lower levels of investment by nonfinancial corporations. This literature focuses on developed countries, particularly the US. Aglietta and Breton (2001) argue that the greater influence of financial markets on nonfinancial corporations and their demands for higher returns influenced executives of nonfinancial corporations to increase their dividend payments and to use share buybacks to raise share prices. They were left with less capital for investment.

      Source: calculated from SARB flow of funds data

      As Crotty (2002) explains, nonfinancial corporations have increased the sizes of their financial subsidiaries and have become involved in more financial speculation. Duménil and Lévy (2004) show that interest and dividend payments from nonfinancial corporations to financial markets increased: nonfinancial

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