Abstract:
The purpose of this study is to analyse the development of inventory investment in South Africa and to investigate the factors that have an influence on it. Although the size of inventory investment relative to gross domestic product is very small, the contribution of inventory investment to the growth in gross domestic product is significant. This study has found that, although the cyclical behaviour of inventory investment in South Africa is similar to that in developed countries, the relationship of inventories, production and sales differ. The variance of sales exceeds the variance of production and there is a negative correlation between inventory investment and sales. This difference with developed countries is also found in other developing countries. On this basis the production-smoothing hypothesis is accepted as relevant to describe inventory investment in South Africa. Furthermore, inventory data are only available on a quarterly basis. The features of inventory investment were therefore investigated with an inventory adjustment approach. The econometric model describes how the level of inventories adjusts when it deviates from the desired level. The desired inventory level is a function of the ratio between inventories and sales, which can change during the business cycle. The ratio between sales and prices, unfilled orders, interest rates and production has an influence on this ratio. In addition, the model describes the adjustment of inventories when actual sales deviate from expected sales. The results of the model confirm that unfilled orders, the level of prices, current interest rates, production, actual sales and expected sales have an influence on the development of inventory investment. Of significant importance is the ability to identify unplanned inventory investment and the finding that interest rates have an impact on inventory investment. The contribution of this study is the identification of factors that have an impact on the development of inventory investment in South Africa. With this it is possible to improve the explanation of changes in inventories and its impact on the gross domestic product, therefore helping to improve economic policy formulation.
