IDENTIFICATION OF FACTORS THAT COULD INFLUENCE CONSUMER FINANCIAL VULNERABILITY

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THE INTERNATIONAL TRADE CHANNEL AND CONSUMER FINANCIAL VULNERABILITY

The effect of the international trade channel on consumer financial vulnerability can be described as follows: during times of sluggish international growth and contracting levels of international development, fewer production opportunities would be available through the international trade channel. Fewer production opportunities result in lower levels of international income and thus lower levels of international spending and, for example, less appetite for South African commodities resulting in lower exports of commodities. Due to lower exports, South African producers have excess stock levels and therefore have to reduce their production output. Being unable to sell the same number of products, producers’ income earnings decrease, which translates into lower profits and decreased consumer remuneration due to, among others, an increase in unemployment. Consumers are then exposed to feelings of financial vulnerability as their income faces downward pressure, so that they also experience pressure to maintain their expenditure commitments. This situation puts further pressure on consumers to maintain their saving. In addition, consumers also experience pressure to maintain their debt servicing responsibilities.
Defaulting on their debt servicing responsibilities could lead to a reduction in the demand to hold money. The lower money demand puts pressure on interest rates to decrease. The decrease in interest rates, however, encourages producers to produce and invest more. Increased levels of investment put pressure on total spending to increase. If total expenditure increases, total production follows suit, which provides an incentive to producers to employ more workers, ultimately resulting in higher levels of consumer income and lower levels of consumer financial vulnerability. This relationship was illustrated in figure 1.5 but is repeated in figure 3.1 for convenience’s sake.

International economic environment

By applying economic chain reasoning, it is apparent that weakening or contracting international economic growth will exert a significant negative effect on the South African economy. Even though the effect can be calculated via the trade, financial market as well as currency channels, the current example will focus on the trade channel. Weaker or contracting international economic growth reflects a slowing or shrinking in the international demand for goods and services. This will negatively affect production in South Africa, which will be reflected by lower exports. Lower production also means that fewer production factors are needed, which, in turn, will lead to job losses. As this will have a negative real effect on consumer income, consumers will not be able to continue their expenditure (reflected in South Africa’s imports), saving and credit behaviour, making them financially more vulnerable. A summary account of the influence of the international economic community on the South African economy is reflected in the external account (Account 5) in table 2.2. The external account is also referred to and more commonly known as the balance of payments. The balance of payments shows all the transactions with the international community stretching from the value of merchandise trade, international services delivered and received, and the income received and paid accruing from capital flows (such as investments).
Should payments to the international community (for imports, services received and income from investments paid) exceed receipts, the current account of the balance of payments will be in deficit and vice versa. Should there be a deficit position, it must be financed by capital inflows, which is the saving (investments) by foreigners.
Should the inflows not accrue however, they could cause an economy to become vulnerable. In such situations, consumers would feel the pinch via various channels such as unemployment, a weaker currency leading to higher consumer price inflation, an inability to maintain their expenditure, and consumers falling in arrears with debt servicing commitments.
Although it is not the focus of section 3.2, it is prudent also to explain briefly how South African consumers’ financial vulnerability is affected via the financial and currency market channels in an environment of weakening or contracting international economic growth. International investors, sensing a weakening international economy, become risk averse and sell risky assets such as shares in developing countries such as South Africa. This causes the price of shares to decline, thereby lowering the value of investments in retirement funds (which form part of consumer assets). As investors also sense lower profits due to declining production by companies, share prices decline even more, further lowering the value of consumers’ investments in retirement funds. This also reduces dividend payments, which negatively affect consumers’ income earnings, which in turn affect their expenditure, saving and credit behaviour. In addition, as international investors sell their risky assets (shares) in South Africa, it means an outflow of capital as the South African rand will be sold (as the investments are held in South African rand) and dollars (or euros, or other currencies) will be purchased. This weakens the value of the rand against other currencies. The weaker rand, in turn, makes imports more expensive, thereby putting pressure on consumer prices to increase. As this reflects more expensive prices of goods and services, it means eroding consumer purchasing power, which also negatively affects consumer financial vulnerability as consumers are unable to keep up their expenditure, saving and debt commitments.
Moreover, as South Africa imports more than it exports, the difference (current account deficit) must be financed via capital inflows (mostly investments) from foreign investors. However, as explained above, during times of a weakening or contracting international economy, international investors normally sell their risky investments, which leads to capital outflows or lower capital inflows. Account 5 in table 2.2 shows that international capital inflows (financial account and unrecorded transactions) declined from R187.7 billion in 2008 to R113.9 billion in 2009. This added further pressure on the South African rand to depreciate, making domestic consumer prices even more expensive, thereby further affecting consumers’ financial position negatively and increasing their financial vulnerability.

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CHAPTER 1: WHAT IS CONSUMER FINANCIAL VULNERABILITY?
1.1 INTRODUCTION
1.2 THE PURPOSE STATEMENT
1.3 ONTOLOGICAL AND EPISTEMOLOGICAL FOUNDATIONS OF THE STUDY
1.4 A BRIEF INTRODUCTION TO POSSIBLE CAUSES OF CONSUMER FINANCIAL VULNERABILITY
1.5 RESEARCH DESIGN
1.6 ETHICAL CONSIDERATIONS
1.7 STRUCTURE OF THE STUDY
1.8 CONCLUDING REMARKS
CHAPTER 2: THEORETICAL LENSES AND FINANCIAL ACCOUNTS
2.1 INTRODUCTION
2.2 CHAIN REASONING
2.3 NATIONAL ACCOUNTS OF SOUTH AFRICA
2.4 CONSUMERS’ FINANCIAL STATEMENTS
2.5 CONSUMPTION THEORIES .
2.6 BEHAVIOURAL FINANCE
2.7 CONCLUDING REMARKS
CHAPTER 3: IDENTIFICATION OF FACTORS THAT COULD INFLUENCE CONSUMER FINANCIAL VULNERABILITY
3.1 INTRODUCTION
3.2 THE INTERNATIONAL TRADE CHANNEL AND CONSUMER FINANCIAL VULNERABILITY
3.3 DEVELOPMENT FACTORS INFLUENCING CONSUMER FINANCIAL VULNERABILITY
3.4 FINANCIAL ATTITUDES AND CONSUMER FINANCIAL VULNERABILITY
CHAPTER 4: RESEARCH METHODOLOGY AND DESIGN
4.1 INTRODUCTION .
4.2 RESEARCH METHODOLOGY OF THE ACCOUNTING AND FINANCIAL DISCIPLINES
4.3 RESEARCH METHOD
4.4 CONCLUDING REMARKS .
CHAPTER 5: DISCOVERING THE CAUSAL CHAIN OF CONSUMER FINANCIAL VULNERABILITY
5.1 INTRODUCTION
5.2 OVERALL CONSUMER FINANCIAL VULNERABILITY INDEX
5.3 INCOME VULNERABILITY INDEX
5.4 SAVING VULNERABILITY INDEX
5.5 EXPENDITURE VULNERABILITY INDEX
5.6 CONCLUDING REMARKS
CHAPTER 6: CONCLUSIONS AND RECOMMENDATIONS