country risk and capital flows the case of south africa by group no. 2
DESCRIPTION
Country Risk and Capital Flows The case of South Africa by group no. 2. Background. South Africa has undergone a great deal of political change The implication were among a number of thinks a significant reduction in the country risk associated with investments in SA. - PowerPoint PPT PresentationTRANSCRIPT
Global Trade Analysis Project
• South Africa has undergone a great deal of political change
• The implication were among a number of thinks a significant reduction in the country risk associated with investments in SA.
• Implementation in the GTAP model:
– standard model and GE closure
– no need for swaps
Background
Global Trade Analysis Project
• Shock:
• Estimate based on ‘real observations’
• Measure based on Deutchmark bond issues fell by 13.5 per cent
• We shock the cgdslack by this amount (-13.5 per cent)
Implementation
Global Trade Analysis Project
Expected rate of return
rore(r) = rorg = cgdsslack
Allocation of investments:
rore(r) = rore(r) - RORFLEX*(ke(r)-kb(r))
Model equations
Global Trade Analysis Project
Results
South Africa
Investments, US$ bn 10- qcdgs - quantity, % change 35.9- pcdgs - price, % change 4.9
Welfare measure - EV, US$ bn 2726- Allocative efficiency effect (+ imp) 862- Terms of trade effect (pexport) 1337- Terms of trade - capital goods 528
Global Trade Analysis Project
• Derived direct demand from cap. good sector
– Techmnfc
– Svces
• Factor market effects
– factor intensities in expanding sectors
– factor prices (+)
• Supply prices (zero profits)
• Trade effects (effects on other regions)
Results - demand for intermediates and factors
Global Trade Analysis Project
Risk Premium decline: FTA among SA and Rest of Southern Africa
•Pre-shock data FTA and Non-FTA
•Post-shock data FTA and Non-FTA
•Welfare effects on Rest of S. Africa
Global Trade Analysis Project
Pre-shock trade flows RESTSA - SA (US$ m)
Exports ImportsFTA non-FTA FTA non-FTA
1 AGRIC 123 99 152 1352 EXTRACT 31 24 178 1553 FOOD 71 43 388 3034 LITMNFC 921 123 493 1405 TECHMNFC 118 60 1180 8916 HVYMNFC 69 58 1164 9977 SVCES 20 22 42 40Total 1354 429 3597 2660
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Pre-shock inputs to capital goods
industry, SAFTA Non-FTA
1 AGRIC 0 02 EXTRACT 8 83 FOOD 0 04 LITMNFC 0 15 TECHMNFC 6515 63846 HVYMNFC 6 67 SVCES 21 20Total 6550 6420
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Post-shock: Welfare effects
SAFRICA RESTSAFFTA Non-FTA FTA Non-FTA
alloc 834 862 37 -10tot 1343 1337 -137 -119cdgs 535 528 4 1Total 2710 2726 -97 -129
% change 2.3 2.3 -0.6 -0.8utility
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Post-shock: Increased Allocative Efficiency, Rest of Southern Africa
Allocative effect 37
EU 21 ROW25
mtax
47-
Light manfTech manf
Heavy manf
Light manfTech manf
Heavy manf
Increased imports to RESTSAF from EU and ROW
Global Trade Analysis Project
Introduction: The RORFLEX and The Rate of Return Approach
The sensitivity of the RORFLEX
Backward shock
Global Trade Analysis Project
RORE( r )=RORC( r)[KE( r ) / KB( r )] -
RORFLEX( r )
This rate declines as capital stock rises..
The rate at witch this decline is expected is a function of the flexibility parameter RORFLEX(r ) > 0
So
Investment depends on
‘expected’ rate of return in next
period
Global Trade Analysis Project
Expected rate of return
RORE( r )=RORC( r)[KE( r ) / KB( r )] -
RORFLEX( r )
Current period rate of return
End of period Capital stock
Beginning capital
stock
ROR Flexibility(param
eter)
Thanks, to Soren and Rob
More about RORE( r)...More about RORE( r)...
Global Trade Analysis Project
Modeling risk Modeling risk
•The global bank equalizes risk-adjusted rates of return, so that risk-adjusted rates for all regions are egal to some global average;
•with:
• RORE( r)= non risk-adjusted expected rate of return
•RISK( r)= ratio of equilibruim returns in region r to the global average rate of return
Global Trade Analysis Project
We have
RORE(r )/RISK( r)=RORG => RORE( r) = RISK( r) * RORG
by total differentiation
rore(r ) = rorg + risk( R)
We have also
rore(e)= rorg + cgdslack(s ) [equation 11’ , Hertel and Tsigas]
so
cgdslack(r )=risk(r )
==> cgdslack is equivalent to the percentage change in the variable RISK
We can refer to this, rather than risk
A risk premiumA risk premium
Global Trade Analysis Project
RORFLEX …and regional investment changes
• A small RORFLEX needs large changes in end of capital stock, KE(r ), to induce small changes in RORE(r )
• THEN
– Low values of RORFLEX(r ) lead to big changes in regional investment
– High value lead to small changes:” In this case the supply of new capital goods is not very sensitive to changes in the expected return
•We assume that investors behave that changes in regional rates of return are equalized across regions;
•the global rate of return changes by the same percent
:
Global Trade Analysis Project
RORE=f [RISK(r)]
(Supply Capital)
5%
10%
20%
RORFLEX
THE SENSITIVITY OF THE RORFLEX
dK
-13%Cgdslack(r )
Global Trade Analysis Project
Impacts of RORFLEX
Impacts on net capital inflow and welfare effects.
Simulations: change value of RORFLEX
Shock is always the same (cgdslack = -13.5%)
• RORFLEX = 10% (base run)
• RORFLEX = 5%
• RORFLEX = 20%
RORFLEX is changed for all five regions.
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Net Capital Inflow
0
25000
50000
5% 10% 15% 20%
RORFLEX
ne
t C
ap
ita
l In
flo
w
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Backward shock
Time
shock -13.5%
Net Capital Inflow in SA
15’676
5’7265‘0
27 -414
+13.5%
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Why an Adjustment?
Time
5’7265‘0
27 -414
-1’797
7’523
5’441
Net Capital Inflow in SA
Global Trade Analysis Project
Possibilities of Adjustment
Problem: Change of Investment is too big compared with the historical Values
Possibilities:• Shock; Assumption is still the same (Shock
cgdslack=+13.5%)
• RORFLEX; Increase of RORFLEX reduces Investment
Global Trade Analysis Project
Calculated Value for RORFLEX
5000
7000
10 11 12 13 14
RORFLEX (in %)
net C
apita
l inf
low
5’441
13.25
Global Trade Analysis Project
How to shock ?
• SHOCK BASE SHOCK
capital inflow into South Africa: negative shock to “cgdslack”
cgdslack("safrica") = -13.5
ADDITIONAL SHOCK
technical progress at TECHMNFC & SVCES: positive shock to “ao”
ao("TECHMNFC","SAFRICA") = 1.0
ao("SVCES","SAFRICA") = 1.0
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Initial effects induced by Tech change
Capital inflow = Direct Investment Capital Stock increase
Management resource ( know-how , hi-tech etc) increase
Technical Progress Price fall (equation (6’))
Output increase (equation(35)(36))
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BASE EXT
1 alloc_A1 862 11052 endw_B1 0 03 tech_C1 0 17734 uinc_D1 -1 -25 tot_E 1337 15576 cgds_F 528 618Total 2726 5051
Welfare Decomposition (1)
A : summarized welfare report
Global Trade Analysis Project
Welfare Decomposition (2)
1 AGRIC 02 EXTRACT 03 FOOD 04 LITMNFC 05 TECHMNFC 2386 HVYMNFC 07 SVCES 15368 CGDS 0Total 1773
1 output 17732 primfac 03 v_added 04 ininput 05 transp 0Total 1773
C1 : TECH decomp. Tech change
C11 : AO cont. output augm. tech change
Global Trade Analysis Project
Market Price (pm) change
BASE EXTLand -11.9 -12.4UnskLab 8.0 10.6SkLab 9.5 12.4Capital 7.6 10.2NatRes -12.5 -14.3AGRIC 4.9 6.5EXTRACT 3.0 3.7FOOD 5.5 6.8LITMNFC 5.7 7.2TECHMNFC 5.9 6.4HVYMNFC 6.3 7.8SVCES 7.0 7.7CGDS 4.9 5.4
% change
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Volume change in Endowments
AGRIC EXTRACT FOOD LITMNFC TECHMNFC HVYMNFC SVCES
Land 0 0 0 0 0 0 0UnskLab -99 -181 -16 -174 -90 -425 985SkLab -2 -35 -10 -33 -36 -108 223Capital -112 -175 -9 -69 -82 -529 975NatRes 0 0 0 0 0 0 0
AGRIC EXTRACT FOOD LITMNFC TECHMNFC HVYMNFC SVCES
Land 0 0 0 0 0 0 0UnskLab -114 -218 -6 -202 -88 -500 1128SkLab -2 -42 -8 -38 -38 -126 254Capital -128 -211 2 -81 -77 -623 1118NatRes 0 0 0 0 0 0 0
BASE
EXT
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Export quantities change
BASE EXTAGRIC -16.8 -21.6EXTRACT -12.6 -15.5FOOD -20.0 -23.9LITMNFC -29.0 -34.8TECHMNFC -29.8 -31.6HVYMNFC -20.8 -24.9SVCES -17.6 -19.0
% change
Global Trade Analysis Project
SOME CONCLUSIONS
Additional impacts on “ao( , )” cause :
• SVCES sector growth
• endowments concentration to SVCES
• Other sectors scale decrease
• Total export decrease (more capital inflow)
Global Trade Analysis Project
Variable Original Endogenous Capital Stock
Gross investment 36 US$ b 30 US$ b
Depreciation 19 US$ b 22 US$ b
Net Investment 17 US$ b 8 US$ b
Capital Stock 0% 18%
Rental price 7.6% -8.5%
qgdp 0.6% 6.1%
Global Trade Analysis Project
Original Endogenous Capital Stock
Bal. of Trade -10 US$ b -1 US$ bWelfare 3 US$ b 8 US$ bcnt_tot +1.9 US$ b -0.3 US$ b
pexport (share) 99% 100%
-------------------------------------------------------------------------------- Perc. changes Exports
Price Qty. Price Qty.
Extraction 3.0 -13 -0.2 +0.7
Hvymnfc 6.3 -21 -1.6 +6.4
Svces 7.0 -18 -0.8 +2.2
Global Trade Analysis Project
Perc. changes Original Endogenous Capital StockPrice Qty. Price Qty.
Capital 8 0 -9 18Land -12 0 15 0
Nat. Res, -13 0 6 0Unsklab 8 0 4 0
Sklab 10 0 4 0
--------------------------------------------------------------------------------
Agriculture 4.9 -3.9 -0.4 +3.3
Hvymnfc 6.3 -8.4 -1.6 +7.2
Svces 7.0 +2.7 -0.8 +6.0