1. Financialisation and the South African Economy

2. Financialisation Definition Drivers Characteristics
Economic consequences

3. 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)

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

5. 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

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

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

8. 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

9. 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

10. Source: Philippon and Reshef (2015)

11. Source: SARB Quarterly Bulletin, own calculations

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

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

14. Source: seekingalpha.com

15. 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

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

17. 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

18. 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

19. Assets under management (% of GDP)
Step change 1990
Source: SARB, own calculations

20. 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

21. Source: SARB Quarterly Bulletin
Spot
Forwards
Source: SARB Quarterly Bulletin

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

23. 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

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

25. Source: Fasianos, Guevara and Pierros (2016)

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

27. 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

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

29. 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

30. 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

31. 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

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

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

36. Source: BIS March 2018

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

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

39. 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

40. Source: Furman and Orszag

41. Source: Mergence Investment Managers

42. 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

43. Source: SARB Quarterly Bulletin, own calculations

44. Source: Mergence Investment Managers 2017

45. 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

46. 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

47. 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

48. 2009 - ?: The future of finance
financialisation is here to stay
mutating into new forms
is financialisation all good or bad?

49. End of story