Journal Issue

2. Recent Trends in Capital Flows

Gavin Gray, and Tamon Asonuma
Published Date:
April 2011
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Relative to other emerging markets, South Africa has received significant portfolio flows over the past year, but less in the way of direct investment. Portfolio inflows totaled $15 billion, exceeding 4 percent of GDP for the second year in succession. As elsewhere, the majority of portfolio investment went into debt securities, particularly rand-denominated government bonds, with a smaller share invested in portfolio equity. Foreign direct investment (FDI) flows collapsed to less than 0.5 percent of GDP in 2010.

South Africa’s large weight in emerging-market benchmark indices may have contributed to the tilt in flows. An increasing share of portfolio flows into emerging markets is coming from passive investors that follow standard portfolio indices, or active measures that steer close to such benchmarks. While only accounting for 1.7 percent of emerging-market (EM) GDP, South Africa has a 7.5 percent weight in the MSCI emerging-market equity index, and has received inflows close to this level for most of 2010 (6.3 percent of the equity flow and 7.8 percent of debt flows into 20 “peer” countries).1 It also has a significant weight in most emerging-market bond indices, including the Global Emerging Markets Local Currency Bond Index (GEMEX; 10 percent) and the JP Morgan EMBIG (7.5 percent). Focusing on flows into EM “peer countries,” while South African share of equity flow is proportional to its share of total peer countries’ GDP, its share of bond flows is much higher (Figure A1 in the Appendix).

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