Financialisation and the South African Economy

Financialisation Definition Drivers Characteristics Economic consequences

What do we mean by financialisation? the shareholder value model of corporate governance and the ROE-norm money manager capitalism (Minsky) a pattern of accumulation in which profits accrue primarily through financial channels rather than through trade and commodity production (Krippner) financial neoliberalism which is characterized by domination of the macro economy and economic policy by financial sector interests (Palley) the increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies (Epstein)

Drivers of financialisation neoliberalism/deregulation the growth of savings and the creation of asset pools increasing demand for financial services

Financialisation and the South African economy financialisation primarily a developed markets issue, with the USA at the forefront transmitted through global financial integration: contagion effects spillover effects: e.g global regulatory, accounting and valuation standards due to earlier isolation financialisation only took off in SA in second half of the nineties after integration with international financial system

Source: SARB Quarterly Bulletin, own calculations Take-off 1993 Source: SARB Quarterly Bulletin, own calculations

Source: SARB Quarterly Bulletin, own calculations Take-off 1994 Source: SARB Quarterly Bulletin, own calculations

The defining characteristics of financialisation growth in the size of the financial sector the increasing role of debt/credit the growth in the asset management industry the increase in trading activities high levels of financial innovation the deregulation of financial markets, institutions and activities

The growth of the financial sector increasing contribution of financial services to GDP increasing share of finance in total profits and wages rising ratio of broad money/GDP

Source: Philippon and Reshef (2015)

Source: SARB Quarterly Bulletin, own calculations

Source: SARB Quarterly Bulletin, own calculations Turning point 2002 Source: SARB Quarterly Bulletin, own calculations

The growth in debt global increase in government, corporate, and household debt

Source: seekingalpha.com

The growth in debt global increase in government, corporate, and household debt public debt increase in response to growing acceptability of budget deficits growth in household debt helped along by new products corporate debt/leverage determined by corporate finance practices

Real estate vs corporate loans Source: Sebastian Pool (2018)

The growth in debt global increase in government, corporate, and household debt public debt increase in response to growing acceptability of budget deficits growth in household debt helped along by new products corporate debt/leverage determined by corporate finance practices increased leverage in the banking sector growing importance of credit rating agencies

The growth in asset management creation of asset pools contractual savings discretionary personal savings high-net worth individuals assets backing insurance liabilities alternative asset classes sovereign wealth funds

Assets under management (% of GDP) Step change 1990 1980 - 2016 Source: SARB, own calculations

Growth in trading activity started in forex market, taking off after collapse of Bretton Woods and change to freely floating exchange rates includes vast expansion of derivatives markets

Source: SARB Quarterly Bulletin Spot Forwards Source: SARB Quarterly Bulletin

Source: SARB Quarterly Bulletin Swaps Spot Forwards Source: SARB Quarterly Bulletin

Growth in trading activity started in forex market, taking off after collapse of Bretton Woods and change to freely floating exchange rates includes vast expansion of derivatives markets technology changes trading practices threat to financial stability market manipulation

Financial innovation increase in financial patents (on innovations and trademarks) as share of all patents how useful?

Source: Fasianos, Guevara and Pierros (2016)

Futures and Option Contracts Outstanding in Commodity Exchanges (Number of contracts in millions) Source: José Antonio Murillo (2011)

Regulatory failure reliance on self-regulation inability of regulators keeping up with financial innovation regulatory capture: revolving doors, campaign contributions and political influence regulatory relapse: memory loss, reinterpretation of history and intellectual justification for change regulatory escape: e.g. shadow banking

Shadow banks vs regulated banks in the US Source: Sebastian Pool (2018)

Financialisation and the individual increasing share of financial services in consumption expenditure growing dependence on credit/debt migration from defined benefit to defined contribution retirement plans proliferation of on-line day trading platforms

Economic consequences of Financialisation changed incentives questions regarding the efficiency of capital allocation effect on the distribution of income and wealth the interaction between the real and financial sectors impact on monetary and fiscal policy

Financialisation and changed incentives solving the agency problem through stock options rather than exercising fiduciary responsibility change to short-termism executive compensation positively correlated with corporate size encouraging herd behaviour focus on ROE/growth in earnings-per-share the moral hazard problem

Efficiency of capital allocation growing internal capital market mergers and acquisitions share buy-backs cash hoarding

Efficiency of capital allocation growing internal capital market mergers and acquisitions share buy-backs cash hoarding asset management: active vs passive investment

Source: BIS March 2018

The distribution of income and wealth the share of capital in income increased and that of labour decreased

Source: SARB Quarterly Bulletin, own calculations Productivity Remuneration Source: SARB Quarterly Bulletin, own calculations

The distribution of income and wealth the share of capital in income increased and that of labour decreased an increase in managers’ share in labour income at the expense of non-managers

Source: Furman and Orszag

Source: Mergence Investment Managers

The distribution of income and wealth the share of capital in income increased and that of labour decreased an increase in managers’ share in labour income at the expense of non-managers the growth in large corporations and their role in rising inequality the interest share rising with the profit share declining increased rentier incomes

Source: SARB Quarterly Bulletin, own calculations

Source: Mergence Investment Managers 2017

The macro-economic implications of financialisation creation of a growing structural aggregate demand gap filled by increasing debt credit became an important driver of demand growth asset price inflation plays bigger role in consumption interest transfer payments increasingly affects aggregate demand through differences in propensities to spend financialisation has slowed down growth by suppressing consumer demand, but also by curtailing investment

Financialisation and monetary policy financialisation resulted in a bigger role for central banks and monetary policy push for greater central bank transparency support for central bank independence central bank mandates changed to inflation targeting influence on causes of inflation and monetary policy transmission channels role of financial cycles: credit and property prices macro-prudential oversight: accept responsibility for financial stability, prevention of asset price bubbles - conflicts of interest

Financialisation and fiscal and tax policy Structural demand for government securities creates incentive for sustained deficits Market discipline and the role of credit rating agencies Managing government debt according to market needs and preferences Tax revenue: the challenge of corporate taxation

2009 - ?: The future of finance financialisation is here to stay mutating into new forms is financialisation all good or bad?

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