Equity flows seek growth and South Africa has to boost its growth in order to attract these flows, said Reserve Bank governor Lesetja Kganyago.

Kganyago was speaking at the Monetary Policy Forum held at the South African Reserve bank (SARB) offices in Pretoria on Monday night. The second edition of the Monetary Policy Review for 2016 was issued by the SARB on Monday.

“Equity flows and bond flows react to different things,” he explained. Where equity flows are attracted by growth, bond flows follow yields, he said.

“There are now $12-trillion worth of bonds in advanced economies trading at yields below zero,” he said. Some advanced economies have low or even negative bond yields. Emerging markets have positive yields and as a result bond flows are attracted to these emerging markets, he explained.

Previously, Siboniso Nxumalo, the co-head of Old Mutual Investment Group’s Global Emerging Markets boutique, told Fin24 that high interest rates in emerging markets which guarantee high returns are attractive to investors.

However, compared to other emerging markets, South Africa has seen outflows of equities, partly because assets offer less growth. Investors prefer to move capital from safer assets that offer less growth and invest in riskier markets that offer higher growth, he explained.

Most recently Brexit has boosted the attractiveness of emerging markets, added Chris Loewald, head of policy development and research. This is in addition to subdued inflation rates worldwide which make emerging markets attractive.

SLOWING GLOBAL GROWTH
World growth potential has slowed and the International Monetary Fund has revised down the global growth forecast to 3.1% in 2016 and 3.4% in 2017, according to the review. This is a downward movement by one base percentage point for both years. These levels are not favourable compared to the average of 3.8% for the last 15 years.

“The growth rates we were used to in the 2000s may not manifest again,” said Loewald. “We may be stuck in an era of lower growth going forward.”

Global conditions could have a negative spillover effect on emerging markets. GDP growth in emerging markets is only expected to improve in 2016 and 2017 as the recessions in Brazil and Russia come to an end, and not necessarily because growth in major economies is picking up.

Looser monetary policies adopted by advanced economies could weaken capital flows to emerging markets, the review stated.