Consumer financial vulnerability: identifying transmission linkages that could give rise to higher levels of consumer financial vulnerability

Abstract

Several macroeconomic indicators point to high consumer financial vulnerability in South Africa. These include, inter alia, a relatively high household debt-to-disposable income ratio, household consumption expenditure outstripping household disposable income and a declining real household net wealth-to-disposable income ratio.
In a 2009 study, the first level of possible predictors of consumer financial vulnerability was identified. However, no study has been conducted in South Africa to establish the transmission path of consumer financial vulnerability. This paper attempts to identify such a transmission path by determining the order in which the four aspects of the consumer financial vulnerability index, namely consumer income, expenditure, savings and debt servicing vulnerability, impact on one another, making consumers more vulnerable. This was done by means of an econometric modelling technique called Vector Autoregression (VAR) using consumer financial vulnerability data series covering the period Q2 2009 to Q2 2012.
The VAR results show that expenditure vulnerability received the highest coefficient of determination score. This indicates that expenditure problems are the Achilles’ heel of South African households, which activates the postulated consumer financial vulnerability index (CFVI) transmission path. To determine the extent to which other macroeconomic variables impact on the postulated CFVI transmission path, a consumer price index (CPI) time series was entered exogenously into the existing VAR equation. It appears from the results obtained that the exogenous inclusion of CPI in the model made a dramatic difference with respect to income and expenditure vulnerability. By including the prime lending rate variable exogenously in the CFVI transmission path, the strong impact of the prime rate on expenditure vulnerability became evident. Finally, by adding the expanded unemployment variable exogenously to the CFVI transmission path in addition to the CPI and prime rate variables, debt servicing vulnerability was strongly impacted. From the CFVI transmission path findings, it became evident that consumers are not able to afford their required necessities, which leads to their becoming expenditure vulnerable. If consumers cannot generate more income to compensate, they become income vulnerable. They draw on their savings to finance the excess expenditure and become savings vulnerable, and if they cannot afford the necessary credit they require to finance their expenditure and have no savings left, they become debt servicing vulnerable.

Key words: consumer financial vulnerability, transmission path, personal finance, vector autoregression, vulnerability measurement