The bond market and economic growth in South Africa

Addae-Manu, Richard (2016-12)

Thesis (MDF)--Stellenbosch University, 2016.


ENGLISH SUMMARY : The study examines the finance-growth nexus within African financial markets by investigating the causal relationship between bond market capitalization in South Africa and Gross Domestic Product (GDP) between 1989 and 2014. Johanssen co-integration tests, time series vector error correction model (VECM), variance decomposition forecasts, impulse response functions and Granger causality tests were used to explore the relationship. The study contributes to ongoing policy debates on the contentious causal relationship between financial markets and the real economy that ultimately affect financial market reforms. Unlike prior studies, corporate bonds and Government bonds were examined independently and in aggregate to capture any particular sectoral influences on the economy. The findings indicated that the GDP and bond market capitalization time series variables were integrated of the first order, implying that they were non-stationary in their levels. Secondly, the pairwise variables were co-integrated and a significant one-way supply-leading relationship was found to exist between all the bond categories (aggregate bonds, government bonds and corporate bonds) and the real economy in the long run. Investigation into the short-run interactions found no significant Granger relationship but the variance decomposition forecasts confirmed the major influence of the bond market on GDP growth. Lastly, in the long run the government bond market leads the growth of the corporate bond market in South Africa. The results infer that the aggregate bond market, and in particular the corporate bond market, could play a major role in mobilizing resources to drive growth opportunities in the real economy. Further research is required into the determinants and factors that could drive the expansion and deepening of the bond market as this could potentially be a major driving force behind government’s economic growth targets.

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