Do Local Investors Play a Stabilising Role Relative to Foreign Investors After Economic Shocks?

Abstract

To what extent do local investors play a stabilising role relative to foreign investors after economic shocks to United States (US) and South Africa (SA) GDP growth and policy rates? Evidence indicates that there is repatriation and retrenchment activity following the repo rate changes. Furthermore, we establish differing responses to positive US GDP growth and Federal Funds Rate (FFR) shocks. Local investors do not play a stabilising role following a positive US GDP growth shock. But they do play a stabilising role with a long delay due to positive US policy rate shocks. In addition, the results show that gross capital outflows decline for a prolonged period compared to an increase in gross capital inflows due to a positive repo rate-FFR spread shock. This evidence indicates that gross capital outflows are more responsive to the repo rate-FFR spread in favour of the repo rate. This implies that improved economic prospects and news from the South African economy can improve the repatriation of assets by local investors. The movement of foreign and domestic investors in the same direction may indicate that investors seek existing arbitrage opportunities in the short-term interest rate differential. Thus, a positive repo rate-FFR spread shock does matter for gross capital outflows.