Global Trade Analysis Project Country Risk and Capital Flows The case of South Africa by group no. 2.

Global Trade Analysis Project

Country Risk and Capital FlowsThe case of South Africa

by group no. 2


• 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


• 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


Expected rate of return

rore(r) = rorg = cgdsslack

Allocation of investments:

rore(r) = rore(r) - RORFLEX*(ke(r)-kb(r))

Model equations


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


• 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


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


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


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


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


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


Small Group II

Extension:

•Effects of Changing RORFLEX parameter


Introduction: The RORFLEX and The Rate of Return Approach

The sensitivity of the RORFLEX

Backward shock


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


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)...


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


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


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

:


RORE=f [RISK(r)]

(Supply Capital)

5%

10%

20%

RORFLEX

THE SENSITIVITY OF THE RORFLEX

dK

-13%Cgdslack(r )


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.


Net Capital Inflow

0

25000

50000

5% 10% 15% 20%

RORFLEX

ne

t C

ap

ita

l In

flo

w


Welfare Effects

0

5000

10000

15000

5% 10% 15% 20%

RORFLEX

wel

fare


Backward shock

Time

shock -13.5%

Net Capital Inflow in SA

15’676

5’7265‘0

27 -414

+13.5%


Why an Adjustment?

Time

5’7265‘0

27 -414

-1’797

7’523

5’441

Net Capital Inflow in SA


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


Calculated Value for RORFLEX

5000

7000

10 11 12 13 14

RORFLEX (in %)

net C

apita

l inf

low

5’441

13.25


EXTENSIONAL

GROUP 2

SINICHI YAMAGUCHI

MANABU SHIMASAWA

SIMULATION


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


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))


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


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


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


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


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


SOME CONCLUSIONS

Additional impacts on “ao( , )” cause :

• SVCES sector growth

• endowments concentration to SVCES

• Other sectors scale decrease

• Total export decrease (more capital inflow)


Endogenous capital stockGregg Watts

andA. Salazar Brandao


K’ long run capital stock

Y”Y’

Y

K K’

Y’Y’

YY

K

Y


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%


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


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

Global Trade Analysis Project Country Risk and Capital Flows The case of South Africa by group no. 2.

Documents

africa slide

sa slide

global bank

period slide

rorer risk r

rorg risk r

row slide

expected rate of return