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The Impact of Commodity Prices, Interest Rate and Exchange Rate on Stock Market Performance in South Africa
(University of the Witwatersrand, Johannesburg, 2023) Mudau, Phathutshedzo; Godspower-Akpomiemie, Euphemia
The relationship between commodity prices and the stock market has been an important focus in literature. This relationship is especially important for a rich mineral resource country with an export-based economy like South Africa. Fluctuating commodity prices create significant business challenges, impacting production costs,product pricing and profitability. Understanding factors that affect the stock market performance becomes important, since the performance of the stock market is associated with the economic condition. This study examined the sensitivity of stock market performance to fluctuations in commodity prices and macroeconomic factors, using monthly data that spans from January 2005 to December 2020. Crude oil and platinum were selected as commodities while interest rate and exchange rate were selected as macroeconomic factors for this study. Ordinary Least Square (OLS) regression method was deployed, together with quantile regression, in this study to achieve the objective. The resulting OLS regression model was also tested for goodness of fit and the residuals tested to validate the model. It was found that commodity price fluctuations affect stock market performance positively and macroeconomic factors affect it negatively. An increase in platinum price caused an increase in the stock market performance. This reflects the importance of palatinum as one of the most produced and exported minerals in South Africa. Crude oil price fluctuations had a positive impact on the stock market performance. The positive impact could be due to South Africa’s trade balance or the source of the crude oil price shock. Exchange rate showed the highest impact on the performance of the stock market. Cheaper imports shift demand from locally produced goods in favour of import, affecting their profitability. Interest rate had a negative but insignificant impact on stock market performance.
The effect of exchange rate and inflation on the stock market returns of the top mining companies in South Africa
(University of the Witwatersrand, Johannesburg, 2022) Mangere, Murehwa; Malikane, Christopher
This research study examines the impact of nominal Rand/USD exchange rate and inflation on the nominal stock returns of top mining companies in South Africa that are listed on the Johannesburg Stock Exchange (JSE). The selected mining companies for this study formpart of the FTSE/JSE Precious Metals and Mining Index. The relevant data was collected from Bloomberg over a ten-year period (2010 to 2020). The Johansen cointegration analysis was applied to model the long run relationship between inflation, exchange rate and stock market prices for JSE Precious Metals and Mining Index. The study outcome revealed that, in the long run, there is a negative and significant relationship between inflation and the stock market returns. Exchange rate has a negative, though insignificant, impact on the stock market returns for FTSE/JSE Precious Metals and Mining Index in the long run. The outcomes of this study pose important implications, from both a policy and practical perspective. Based on the findings, it is recommended that from a policy perspective, the inflation policy must minimise and stabilise inflation fluctuations. This will result in investor confidence and more investments can be made to revitalise the precious metals mining sector. Furthermore, the findings suggest that exchange rate should be considered at valuation to hedge against currency risk and diversify investments
The Impact of Commodity Prices, Interest Rate and Exchange Rate on Stock Market Performance in South Africa
(University of the Witwatersrand, Johannesburg, 2023) Mudau, Phathutshedzo; Godspower-Akpomiemie, Euphemia
The relationship between commodity prices and the stock market has been an important focus in literature. This relationship is especially important for a rich mineral resource country with an export-based economy like South Africa. Fluctuating commodity prices create significant business challenges, impacting production costs, product pricing and profitability. Understanding factors that affect the stock market performance becomes important, since the performance of the stock market is associated with the economic condition. This study examined the sensitivity of stock market performance to fluctuations in commodity prices and macroeconomic factors, using monthly data that spans from January 2005 to December 2020. Crude oil and platinum were selected as commodities while interest rate and exchange rate were selected as macroeconomic factors for this study. Ordinary Least Square (OLS) regression method was deployed, together with quantile regression, in this study to achieve the objective. The resulting OLS regression model was also tested for goodness of fit and the residuals tested to validate the model. It was found that commodity price fluctuations affect stock market performance positively and macroeconomic factors affect it negatively. An increase in platinum price caused an increase in the stock market performance. This reflects the importance of platinum as one of the most produced and exported minerals in South Africa. Crude oil price fluctuations had a positive impact on the stock market performance. The positive impact could be due to South Africa’s trade balance or the source of the crude oil price shock. Exchange rate showed the highest impact on the performance of the stock market. Cheaper imports shift demand from locally produced goods in favour of import, affecting their profitability. Interest rate had a negative but insignificant impact on stock market performance
The key determinants of foreign direct investment in South Africa
(2021) Rama, Kamil
This study investigates the determinants of foreign direct investment (FDI) in South Africa using annual data for the period 1994-2018. The importance of FDI inflows to South Africa cannot be underestimated, it assists in creating value for investible assets and capital formation, but also brings much-needed stimulus to efficiency, productivity and economic growth. Despite being one of the major recipients of FDI in Africa when compared to other emerging countries the value of these inflows can be considered low and volatile. Based off the literature, Pesaran’ s Autoregressive Distributed Lag (ARDL) model was chosen as the method used to test for cointegration. The ARDL model tests the long-run relationship between FDI and its potential determinants and the error correction model (ECM) estimates the short-run dynamic parameters within the ARDL model. The empirical results show that in the long run exchange rate, trade openness and political stability are the most important factors in determining FDI inflows to South Africa. The short-run coefficients show that political stability has a significant positive effect on FDI inflows, while the number of BITS signed has a significant negative effect. The negative short-run coefficients seen with GDP and exchange rate are not notable due to the coefficients being statistically insignificant. The study recommends that he government should look to implement policies which help promote the liberalisation of restrictions around trade and the movement of capital. This should also include looking into increasing the consistency and transparency of fiscal, monetary and trade policies. Exchange rate targeting strategies should be implemented to help stabilize the exchange rate. Lastly the South African government should maintain regulatory policies which promote political stability and invoke investor confidence.
Essays on private capital flows and real sector growth in Africa
(2021) Asamoah, Michael Effah
Globally, countries continue to implement policies aimed at the attraction and retention of capital flows due to its perceived significant effect on economic growth and development. The benefits of capital flows are touted as being able to drive down domestic interest rates, smooth consumption, transfer of technology and improve the functioning of the financial sector. In as much as there is a copious body of literature on capital flows and economic growth, there remain essential areas that the literature has been silent. Among these are capital flows and real sector growth in the light of the allocation puzzle; the real sector amid financial sector development and institutions; private capital flows-macroeconomic volatilityfinancial development connections, and thresholds in the capital flows-real sector growth dynamics. Filling these gaps will provide the needed knowledge and policy directions on how countries that are known to depend on capital flows can harness these flows for growth and development, especially at the level of the real sector. Using robust econometric procedures, this study examined four thematic areas of capital flows in Africa. The first essay investigated the evidence and/or otherwise of an allocation puzzle and bidirectional relationship between private capital flows and real sector growth. The study covered 42 Sub-Saharan African (SSA) countries between 1980 and 2017. We used growth in manufacturing, industry, agriculture, and services to capture the real sector and proxied private capital flows by foreign direct investment, portfolio equity flows, and private nonguaranteed debt. We employed the two-step dynamic systems GMM model to establish our empirical relationships. We found no evidence in support of the allocation puzzle, which suggests that SSA countries with relatively high growth in the real sector will attract more private capital. However, at a decomposed level, we established a bi-directional relationship of a positive association between debt flows and growth in agriculture and services, with no v evidence of an allocation puzzle. Though we found a bi-directional association between debt and industrial growth, the association was detrimental in both directions. Also, the study established a two-way inverse reverse effect between equity flows and manufacturing growth. Finally, while the impact of foreign direct investment on the real sector is positive at the disaggregated level, there is a positive bi-directional effect between foreign direct investment and growths in manufacturing, industry, and service value additions. The study provides a strong foundation for an alternative source of financing, especially for the growth of the service and agriculture sectors regarding debt and equity, from the reliance on the traditional FDI. The findings also indicate parallel reactions between real sector growth and private capital in SSA. The second essay had two separate objectives fused into one. The first part examined the brinks of financial development at which private capital to Africa enhances growth at the level of the real sector. We deployed a newly developed financial development dataset to moderate the association between private capital and the real sector, and the Lewbel instrumental variable two-step GMM estimator (IV – GMM), with Kleibergen-Paap robust standard errors and orthogonal statistics in establishing our empirical relationships over the period 1990 to 2017, for a sample of thirty (30) countries in Africa. Initial estimations at the overall level of the real sector, manufacturing, and industry show that FDI has no growth effects and even worsens the growth of the agriculture sector. Financial development stifles growth. On decomposing the real sector, we found the interaction between FDI and financial development to enhance the growth of the real sector and its components at face value. However, our marginal effect analysis shows that the growth impact of FDI on the overall real sector, industry, and service sector growth starts at the threshold level of the 25th percentile of financial development, while the growth impact on manufacturing is only evident at the 90th percentile of financial development. Finally, although financial sector growth aids foreign direct investment in enhancing the growth of the agriculture sector, it cannot wholly eradicate the initial adverse impact from FDI. We further found that portfolio equity has no growth impact on Africa’s real sector, while debt flows harm the overall real sector, manufacturing, and industrial growth, but no impact on agriculture and services’ growth. We found that financial development reinforces the conservative view that capital flows enhance economic growth, but the reinforcement depends on the type of sector, either debt or equity, and the percentile levels of financial development. A similar objective was to analyze the interconnections between private capital flows, the quality of institutions, and the growth of the real sector in Africa. The study covers thirty (30) African countries. Our empirical analysis, with a panel data between 1990 and 2017, indicates that private capital flows (FDI, private debt, and equity) have no direct impact on the growth of the real sector. A decomposition divulges that FDI has no impact on manufacturing and detrimental to industrial and agriculture sectors. Portfolio equity is injurious to growth in services and unresponsive to the growth of all other sectors. Private debt was also insensitive to the growth in agriculture and services, and even damaging to manufacturing and industrial growth. Initial assessments show that countries with robust institutional frameworks can benefit significantly from capital flows, as we found institutions do moderate the positive impact of capital flows on the growth of the real sector, starting from the 25th percentile of institutions. Our marginal analysis confirms that the impact of private capital on real sector components is dependent on the type of capital, the sector, and the percentile level on institutions, in some cases, as far as the 90th percentile. Our results show that for policy implementation, it is not a case of one cup fits all, but sector-specific capital flow institutional policies should be the way forward. The orthodox view is that uncertainty is a deterrent to investment, and by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, private capital flows and a newly developed indicator of financial development, the third chapter of the thesis examined the impact of exchange rate uncertainty on private capital flows, and whether financial development matters in such association. Specifically, the study sought to answer four questions: Is the exchange rate uncertainty – capital flows nexus strictly monotonic? Does exchange rate volatility deter capital flows? Can financial development mitigate the adverse effect of economic uncertainty on capital flows? At what threshold point does financial development jettison the negative impact? The study covers 40 countries over the period 1990 – 2017. We establish our empirical relation with a system general method of moments (GMM) two-step robust estimator with orthogonal deviations. We found evidence in support of a non-linear U-shaped relationship between uncertainty and capital flows, and that the impact of uncertainty on capital flows depends on varying levels of uncertainty. We also document that uncertainty deters all forms of capital flows, and that countries with a well-functioning financial system can transform the adverse impact of volatility on capital flows. However, our marginal analysis shows that curbing the adverse effect of volatility on private capital depends on the type of capital flow, the indicator as well as the percentile level on financial sector development, in some cases as far as to the highest percentile. We further established that with the current state of the financial sector, financial institutions’ development offers the quickest route to curtailing the adverse impact of volatility on capital flows, as it has a lower threshold value or critical point compared with financial markets’ development. In the final essay, we investigated the possibilities of non-monotonic or nonlinearities in the capital flows - economic growth dynamics, as some studies posit that the effect of capital flows on economic growth changes course after attaining a certain threshold level, either based on the levels of capital flow itself or some mediating variables. We proxied capital flows by foreign direct investment (FDI) inflows and growth by real sector components. With data from 1990 to 2018, for a sample 36 African countries, the study employed Seo and Shin (2016) dynamic panels threshold effect with endogeneity as well as Seo et al. (2019) estimation of dynamic panel threshold model using Stata to achieve the study’s objectives. In the first part of the analysis, we employed three indicators of human capital development as threshold variables, and FDI flows as the regime dependent variables. These are the mean years of schooling, gross national secondary school enrolment, and primary school pupil to teacher ratio. In the subsequent analysis, we deployed FDI as both the threshold and regime dependent variable. The study found significant thresholds in the capital flows - real sector growth relationship as mediated by human capital and foreign direct investment. The significance impact of foreign direct impact on real sector happens at both the lower and upper levels of the mediating variable but the component of real sector matters. We established that in most cases, the impact of FDI on the growth of the real sector is harmful in the lower regime and beneficial in the upper regime of human capital for both manufacturing and services sectors, and vice versa for both agriculture and industrial sectors. The results indicate that increasing levels of human capital development and FDI inflows are necessary for the growth impact of FDI on Africa’s real sector, but not under all sectors as he results are dependent on the varying threshold variables of both human capital and foreign direct investment
Essays on private capital flows and real sector growth in Africa
(2021) Asamoah, Michael Effah
Globally, countries continue to implement policies aimed at the attraction and retention of capital flows due to its perceived significant effect on economic growth and development. The benefits of capital flows are touted as being able to drive down domestic interest rates, smooth consumption, transfer of technology and improve the functioning of the financial sector. In as much as there is a copious body of literature on capital flows and economic growth, there remain essential areas that the literature has been silent. Among these are capital flows and real sector growth in the light of the allocation puzzle; the real sector amid financial sector development and institutions; private capital flows-macroeconomic volatility-financial development connections, and thresholds in the capital flows-real sector growth dynamics. Filling these gaps will provide the needed knowledge and policy directions on how countries that are known to depend on capital flows can harness these flows for growth and development, especially at the level of the real sector. Using robust econometric procedures, this study examined four thematic areas of capital flows in Africa. The first essay investigated the evidence and/or otherwise of an allocation puzzle and bi-directional relationship between private capital flows and real sector growth. The study covered 42 Sub-Saharan African (SSA) countries between 1980 and 2017. We used growth in manufacturing, industry, agriculture, and services to capture the real sector and proxied private capital flows by foreign direct investment, portfolio equity flows, and private non-guaranteed debt. We employed the two-step dynamic systems GMM model to establish our empirical relationships. We found no evidence in support of the allocation puzzle, which suggests that SSA countries with relatively high growth in the real sector will attract more private capital. However, at a decomposed level, we established a bi-directional relationship of a positive association between debt flows and growth in agriculture and services, with no evidence of an allocation puzzle. Though we found a bi-directional association between debt and industrial growth, the association was detrimental in both directions. Also, the study established a two-way inverse reverse effect between equity flows and manufacturing growth. Finally, while the impact of foreign direct investment on the real sector is positive at the disaggregated level, there is a positive bi-directional effect between foreign direct investment and growths in manufacturing, industry, and service value additions. The study provides a strong foundation for an alternative source of financing, especially for the growth of the service and agriculture sectors regarding debt and equity, from the reliance on the traditional FDI. The findings also indicate parallel reactions between real sector growth and private capital in SSA. The second essay had two separate objectives fused into one. The first part examined the brinks of financial development at which private capital to Africa enhances growth at the level of the real sector. We deployed a newly developed financial development dataset to moderate the association between private capital and the real sector, and the Lewbel instrumental variable two-step GMM estimator (IV –GMM), with Kleibergen-Paap robust standard errors and orthogonal statistics in establishing our empirical relationships over the period 1990 to 2017, for a sample of thirty (30) countries in Africa. Initial estimations at the overall level of the real sector, manufacturing, and industry show that FDI has no growth effects and even worsens the growth of the agriculture sector. Financial development stifles growth. On decomposing the real sector, we found the interaction between FDI and financial development to enhance the growth of the real sector and its components at face value. However, our marginal effect analysis shows that the growth impact of FDI on the overall real sector, industry, and service sector growth starts at the threshold level of the 25th percentile of financial development, while the growth impact on manufacturing is only evident at the 90thpercentile of financial development. Finally, although financial sector growth aids foreign direct investment in enhancing the growth of the agriculture sector, it cannot wholly eradicate the initial adverse impact from FDI. We further found that portfolio equity has no growth impact on Africa’s real sector, while debt flows harm the overall real sector, manufacturing, and industrial growth, but no impact on agriculture and services’ growth. We found that financial development reinforces the conservative view that capital flows enhance economic growth, but the reinforcement depends on the type of sector, either debt or equity, and the percentile levels of financial development. A similar objective was to analyze the interconnections between private capital flows, the quality of institutions, and the growth of the real sector in Africa. The study covers thirty (30) African countries. Our empirical analysis, with a panel data between 1990 and 2017, indicates that private capital flows (FDI, private debt, and equity) have no direct impact on the growth of the real sector. A decomposition divulges that FDI has no impact on manufacturing and detrimental to industrial and agriculture sectors. Portfolio equity is injurious to growth in services and unresponsive to the growth of all other sectors. Private debt was also insensitive to the growth in agriculture and services, and even damaging to manufacturing and industrial growth. Initial assessments show that countries with robust institutional frameworks can benefit significantly from capital flows, as we found institutions do moderate the positive impact of capital flows on the growth of the real sector, starting from the 25th percentile of institutions. Our marginal analysis confirms that the impact of private capital on real sector components is dependent on the type of capital, the sector, and the percentile level on institutions, in some cases, as far as the 90th percentile. Our results show that for policy implementation, it is not a case of one cup fits all, but sector-specific capital flow institutional policies should be the way forward. The orthodox view is that uncertainty is a deterrent to investment, and by extension, private capital inflows. Paying specific attention to the volatility of the domestic exchange rate, private capital flows and a newly developed indicator of financial development, the third chapter of the thesis examined the impact of exchange rate uncertainty on private capital flows, and whether financial development matters in such association. Specifically, the study sought to answer four questions: Is the exchange rate uncertainty –capital flows nexus strictly monotonic? Does exchange rate volatility deter capital flows? Can financial development mitigate the adverse effect of economic uncertainty on capital flows? At what threshold point does financial development jettison the negative impact? The study covers 40 countries over the period 1990 –2017. We establish our empirical relation with a system general method of moments (GMM) two-step robust estimator with orthogonal deviations. We found evidence in support of anon-linear U-shaped relationship between uncertainty and capital flows, and that the impact of uncertainty on capital flows depends on varying levels of uncertainty. We also document that uncertainty deters all forms of capital flows, and that countries with a well-functioning financial system can transform the adverse impact of volatility on capital flows. However, our marginal analysis shows that curbing the adverse effect of volatility on private capital depends on the type of capital flow, the indicator as well as the percentile level on financial sector development, in some cases as far as to the highest percentile. We further established that with the current state of the financial sector, financial institutions’ development offers the quickest route to curtailing the adverse impact of volatility on capital flows, as it has a lower threshold value or critical point compared with financial markets’ development. In the final essay, we investigated the possibilities of non-monotonic or nonlinearities in the capital flows - economic growth dynamics, as some studies posit that the effect of capital flows on economic growth changes course after attaining a certain threshold level, either based on the levels of capital flow itself or some mediating variables. We proxied capital flows by foreign direct investment (FDI) inflows and growth by real sector components. With data from 1990 to 2018, for a sample 36 African countries, the study employed Seo and Shin (2016) dynamic panels threshold effect with endogeneity as well as Seo et al. (2019) estimation of dynamic panel threshold model using Stata to achieve the study’s objectives. In the first part of the analysis, we employed three indicators of human capital development as threshold variables, and FDI flows as the regime dependent variables. These are the mean years of schooling, gross national secondary school enrolment, and primary school pupil to teacher ratio. In the subsequent analysis, we deployed FDI as both the threshold and regime dependent variable. The study found significant thresholds in the capital flows -real sector growth relationship as mediated by human capital and foreign direct investment. The significance impact of foreign direct impact on real sector happens at both the lower and upper levels of the mediating variable but the component of real sector matters. We established that in most cases, the impact of FDI on the growth of the real sector is harmful in the lower regime and beneficial in the upper regime of human capital for both manufacturing and services sectors, and vice versa for both agriculture and industrial sectors. The results indicate that increasing levels of human capital development and FDI inflows are necessary for the growth impact of FDI on Africa’s real sector, but not under all sectors as he results are dependent on the varying threshold variables of both human capital and foreign direct investment
The key determinants of foreign direct investment in South Africa
(2021) Rama, Kamil
This study investigates the determinants of foreign direct investment (FDI) in South Africa using annual data for the period 1994-2018. The importance of FDI inflows to South Africa cannot be underestimated, it assists in creating value for investible assets and capital formation, but also brings much-needed stimulus to efficiency, productivity and economic growth. Despite being one of the major recipients of FDI in Africa when compared to other emerging countries the value of these inflows can be considered low and volatile. Based off the literature, Pesaran’ s Autoregressive Distributed Lag (ARDL) model was chosen as the method used to test for cointegration. The ARDL model tests the long-run relationship between FDI and its potential determinants and the error correction model (ECM) estimates the short-run dynamic parameters within the ARDL model. The empirical results show that in the long run exchange rate, trade openness and political stability are the most important factors in determining FDI inflows to South Africa. The short-run coefficients show that political stability has a significant positive effect on FDI inflows, while the number of BITS signed has a significant negative effect. The negative short-run coefficients seen with GDP and exchange rate are not notable due to the coefficients being statistically insignificant. The study recommends that he government should look to implement policies which help promote the liberalisation of restrictions around trade and the movement of capital. This should also include looking into increasing the consistency and transparency of fiscal, monetary and trade policies. Exchange rate targeting strategies should be implemented to help stabilize the exchange rate. Lastly the South African government should maintain regulatory policies which promote political stability and invoke investor confidence

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