Exploring the causal relationships and allocation puzzle between portfolio investments and real sector growth in Sub-Saharan Africa

Abstract

This study explores the causal dynamics and allocation puzzles between real sector growth and portfolio investments (equity and private debt) in Sub Saharan (SSA). We use growth in manufacturing, industry, agriculture, and services to capture the real sector and employ the two-step dynamic systems GMM model to establish our empirical relationships over the period 1980–2017. We found no evidence in support of the puzzle at the overall level of the real sector and portfolio investments. 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. Finally, the study established a two-way inverse causality between equity flows and manufacturing growth. The paper provides a strong foundation for an additional source of financing, especially for the growth of the service and agriculture sectors. The findings also indicate complementary reactions between real sector growth and portfolio investments in SSA.