The effects of capital inflows on South Africa's economy

Abstract

This article investigates the effects of capital inflows on South Africa's macroeconomy and on the transmission mechanisms of credit extension, asset prices and household consumption expenditure. We find that the capital inflows have varied macroeconomic effects. Furthermore, we establish that the central bank uses a strategy of ongoing sterilisation for portfolio inflows and Foreign Direct Investment (FDI), but does not sterilise other inflows. With regard to the impacts of the capital inflows on the transmission mechanisms, the results indicate that only portfolio inflows have a positive impact on private sector credit extension, mortgage extensions and credit card expenditure. In addition, the results confirm that portfolio and other inflows have more of a positive impact on asset prices than FDI. Finally, we establish that FDI and portfolio inflows lead to increased household consumption expenditure on durables while other inflows have a negative effect on all forms of household consumption.