Impact of financial liberalisation on South Africa

Seeraj Mohamed

IDEAS Conference

Chennai, 25 January 2010

Introduction• Democracy provided opportunity for addressing

legacy of apartheid & weak industrial structure dominated by mining and minerals industry

• Inadequate regulation of finance has – Obstructed government’s attempts to redress socio-

economic problems inherited from apartheid past– Led to massive misallocation of capital– Supported deindustrialisation and made the economy

more dependent on mining & minerals– Supported the ‘wrong’ type of growth based on

speculation and debt-driven consumption– Increased financial fragility and dependence on short-

term capital flows

Net Capital flows (percentage of GDP)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

Net FDI NetPortfolio Net Other

Credit extension and investment as percentages of GDP

0%10%20%30%40%50%60%70%80%90%

100%

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Total fixed capital formationPrivate business enterprises Fixed capital formationTotal domestic credit extension percentage of GDPTotal credit extended to domestic private sector as percentage of GDP

Credit extension to Private sector increased about 22% from 2000-08 BUT Private business investment increased by only 5%

Growth in household consumptionComponents of GDP (real 2000 prices, Rmillions), Source SARB

-200000

0

200000

400000

600000

800000

1000000

Household consumption Government consumption

Gross capital formation (Investment) Exports less imports

Household debt to disposable income of households - Ratio

50

55

60

65

70

75

80

Net capital formation by sector

-20000

0

20000

40000

60000

80000

100000

120000

140000

Foreig

n

secto

r

Oth

er

moneta

ry

institu

tions

Pu

blic

Investm

ent

Corporation

Insurers a

nd

retirem

ent

funds

Oth

er

financia

l

institu

tions

General

govern

ment

Corporate

busin

ess

ente

rpris

es

Household

s

R m

illi

on

s

1993 1995 1997 1999 2001 2003 2005 2007

Net acquisition of financial assets by sector

-50000

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

Fore

ign

secto

r

Oth

er

mo

ne

tary

institu

tions

Pub

lic

Investm

en

t

Co

rpora

tion

Insure

rs a

nd

retire

ment

funds

Oth

er

financia

l

institu

tions

Gene

ral

govern

ment

Co

rpora

te

busin

ess

ente

rprises

Ho

useh

old

s

R m

illi

on

s

1993 1995 1997 1999 2001 2003 2005 2007

-50000

0

50000

100000

150000

200000

250000

300000

350000

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Sources and uses of capital in coporate business enterprises

Net savings

Gross capital formation

Net acquisition of financial assets

Net capital formation (gross capital formation - deprecaiation)

Derivative market - futures contracts : Underlying value (in R billions, current prices)

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

Increased use of derivatives: increase financial systemic risks in SA

Allocation of capital by private sector: - mostly for credit cards, car finance &mortgages; - mostly for short-term and collaterised debt

Investments

Bills discounted

Installment-sale credit

Leasing finance

Mortgage advances

Other loans and advances

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

% o

f To

tal c

red

it e

xte

nd

ed to

the

priva

te s

ecto

r

Private Sector Credit Extension by all Monetary Institutions

Other loans and advances

Mortgage advances

Leasing finance

Installment-sale credit

Bills discounted

Investments

And, even fixed investment is misallocated

General government services

20%

Business services14%

Finance and insurance

13%

Communication10%

Transport and storage

10%

Wholesale and retail trade10%

Electricity, gas and steam

9%

Other mining 8%

Agriculture, forestry and fishing

3%

Coal mining3%

2008 Top 10 Sectors by Investment (as a % of the total investment)

2006 Top 10 sectors by investment (as a % of total investment)

Wholesale& retail trade

7%

Communication8%

Transport &

storage 8%

Finance &

insurance11%

General government services 12%

Business services 14%Other

mining 4%

Electricity, gas&steam, 4%

Coke & refined petroleum products, 3%

Motor vehicles, parts & accessories, 3%

Change in capital stock from 2000 to 2006 for all economic sectors (Real 2000prices, Rmillions, Source: Quantec)

-30000

-20000

-10000

0

10000

20000

30000

40000

50000

Services Employment

-

20,000

40,000

60,000

80,000

100,000

120,000

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

Employment in Services

Wholesale And Retal Trade Catering and Accommodation Transport and Storage

Finance and Insurance Business service Communication (RHS)

Manufacturing EmploymentManufacturing employment 1990-2008

0

50000

100000

150000

200000

250000

300000

350000

400000A1210: Food, beverages and tobacco [301-306]

A1211: Textiles, clothing and leather [311-317]

A1212: Wood and paper; publishing andprinting [321-326]

A1213: Petroleum products, chemicals,rubber and plastic [331-338]

A1214: Other non-metallic mineral products[341-342]

A1215: Metals, metal products, machineryand equipment [351-359]

A1216: Electrical machinery and apparatus[361-366]

A1217: Radio, TV, instruments, watches andclocks [371-376]

A1218: Transport equipment [381-387]

A1219: Furniture and other manufacturing[391-392]

Dependence on MEC sectors intensifies from 1990s

Chart: Value added, 1970-2007 (Source: Quantec)