A multivariate analysis of household debts in South Africa and the USA during the 2007-2009 financial crisis

Abstract

<p>This study takes place against the backdrop of the 2007-2009 financial crisis which had impacted heavily on the well-being of households world wide. This crisis was triggered by the SMC which emerged in the USA. The crisis resulted in increased household debt (HHD) levels in many countries of differing financial sophistication. The crisis also had a deleterious effect on unemployment and interest rates, investment and savings as well as household credit. Recent financial reports show that the effects of this crisis are still being felt in many countries. In the main, this study aims to analyse tren, ls in household debts in SA and the USA and determine the effects of related determinants. Jn household debts. Furthermore, the study identifies differences and/or similarities between the economies of the aforementioned countries. In our study, time-series data collected for the period 90Ql to 13Ql were obtained from the South African Reserve Bank (SARB), Federal Reserve Bank (the Fed) and Statistics South Africa (SSA). The data consisted of determinan1 , of HHD such as house prices (HP), consumer price index (CPI), disposable income (INC ), interest rates (IR), gross domestic product (GDP), household consumption expenditure (HC), household savings (HS), exchange rates (ER), unemployment rates (UR). As far as the methodology is concerned, we mainly employed Johansen's multivariate and discrim inant methods which are executed by using the statistical package, SAS. In particular, our techniques variables contributing to HHD and the relationships be1 ween them. enable us to consider. The findings of this study provide a clear picture of the extent of the impact of the 2007-2009 financial crisis on household debt in SA and the USA. As reflected in the dynamics of the household debt determinants, these countries were both significantly affected during this period. The Error Correction Model (EC M) confirmed that in the long run, increases in household debt in SA can be attributed, in order of importance, to household consumption expenditure, gross domestic product and house prices. The findings for the USA indicated that household consumption and expenditure as well as household income may be associated with increased debts in the long run. The error correction terms were obtained as - 13.78 % and -1.54 % for SA and the USA respectively. The Toda-Yamamoto causality test revealed several important causal relationships. GDP, exchange rates and unemployment rates were found to have unidirectional relationships with other variables in the case of SA with the former two having this relationship in the US A. The generalised impulse response Ill function (GIRF) analysis showed that HHD responds negatively to shocks from changes in house prices. Moreover, forecasts for both countries report increased debts going forward. Fisher's linear discriminant analysis (LOA) identi fi ed five main determinants to be significantly associated with debts in these countries. Moreover, the Mahalanobis distance and Hoteling's test confirm that as much as SA household debt is different from the USA ' there are also significant similarities. In conclusion, the Johansen tests highlighted th e- main causes of HHD in SA and the USA both in the short and long -run. Toda-Yamamoto tests revealed relationships among the ten variables in his study. The GIRF forecasts confirmed using the 95 % level of confidence that in the next five years, household indebtedness will be even higher in SA and the USA. With Fisher's LDA reporting consumer price index, household income, gross domestic product, household consumption and expenditure and t1ousehold savings were identified as the main contributors to debt. Finally, our study recommends the formulation and implementation of policies that will effectively help in dealing with household indebtedness in SA and the USA.