The Impact of Large-Scale Asset Purchases on Non-residents’ Purchases of South African Assets

Do positive shocks to the South African Reserve Bank (SARB) balance sheet impact non-residents’ activity in the domestic financial markets, especially the bond market? We find that a positive shock to SARB assets growth depresses non-residents’ cumulative net purchases of domestic shares and bonds, especially the purchase of bonds. The results also imply that positive shocks to SARB assets growth will also spill over to non-residents’ purchases of shares or equities. These results concur with international evidence showing that large-scale asset purchases by central banks due to the fact that they constrain the supply of government assets (supply effects or supply-induced portfolio rebalancing) available to private investors result in the rebalancing of assets held by investors largely due to the portfolio rebalancing channel. Furthermore, evidence shows that large-scale asset purchases by the SARB exert the most impact on the transitory R/US$ exchange rate volatility component compared to the other exchange rate volatility components. Thus, large-scale asset purchases by the SARB will complement other policy initiatives and tools aimed at curbing the R/US$ exchange rate volatility. In policy terms, large-scale asset purchases by the SARB are part of the policy tools that will contribute to policy interventions aimed at dampening the R/US$ exchange rate volatility. In addition, such a balance sheet strategy addresses the main financial stability risks associated with changes in the global investor risk appetite, especially in light of the fact that a large share of the local currency government debt is held by foreign investors.