3. Literature Review
- Gavin Gray, and Tamon Asonuma
- Published Date:
- April 2011
The literature finds that international portfolio flows are influenced by both global and country-specific factors. The global factors identified by Reinhart and Reinhart (2008) as having a systemic effect on the global capital flow cycle include commodity prices, international interest rates, and growth in the world’s largest economies. Egly, Johnk, and Liston (2010) relate net foreign portfolio investment inflows to the United States (corporate bonds and equities) to two pull factors: investor risk aversion and the U.S. stock market.2Santis and Luhrmann (2009) find evidence from a panel of developing and industrial countries that population aging, the quality of institutions, money supply/GDP, and deviations from uncovered interest parity (UIP) influence net flows.3 Analyzing inward flows to both developed and developing countries, Ghosh and Wolf (2000) note that capital flows increase with the recipient’s proximity to “world GDP” together with geographical distance even for similar fundamentals (as captured by GDP per capita) by applying a gravity model involving FDI, loan, and portfolio flows (debt and equity).4
A subset of the literature focuses on portfolio flows to emerging and low-income countries. Vita and Kyaw (2008) conclude from a panel of 32 developing countries that domestic money growth is the major “pull factor” for portfolio flows to developing countries. Focusing on flows to countries in the Commonwealth of Independent States (CIS), Amaya and Rowland (2004) identify real GDP growth, sound fiscal policies, and moderate external debt levels as country-specific drivers of portfolio flows into the EM countries. On private inflows in Latin America, Chong and others (2003) postulate that corporate governance is also a key determinant together with external factors and political governance shown in previous research. Lastly, Ahmed, Arezki, and Funke (2007) estimate a dynamic panel for 81 emerging markets and find that growth, better institutions, and lower international interest rates together with well-developed financial markets help create a favorable environment for portfolio inflows.
South African-specific analyses have tended to focus on the composition of capital flows, particularly, the heavy share of portfolio flows. Ahmed, Arezki, and Funke (2007) conclude that the share of FDI can be addressed by policies to promote trade and capital account liberalization.5Leape (2009) notes that while South Africa’s weight in the emerging-market indices is high relative to its share of global output, flows were below index weights during the mid-2000s on account of political risk perceptions.