Modelling the demand for credit to the private sector in South Africa : an investigation of aggregate and institutional sector factors

M.Comm. (Economics)The recent global financial and economic crisis has brought about renewed interest in the nexus between credit markets and monetary policy. This research aims to contribute to the understanding of the factors that drive the demand for credit on an aggregate level, and the household and corporate sectors for the South African economy. The study assessed the equilibrium determinants of the aggregate and sectoral demand for credit in South Africa by making use of a cointegrated vector autoregression (CVAR) methodology. In addition, the periods of debt overhang and short-falls, at aggregate and sectoral levels in the credit market, are derived from these equilibrium levels. The estimated models indicate the existence of long-run relationships for the aggregate credit demand equation, a classic demand-type relationship linking aggregate credit with gross domestic product (GDP) and the lending rate is established. For credit extended to the corporate sector, the results indicate that in the long-run it is determined by investment expenditure, operating surpluses and the lending rate. Whereas for credit extension to the household sector, it was found that the lending rate, disposable income and household debt were its important long-run determinants. All the results of the estimated equations are in line with a demand-type relationship and the traditional hypothesis that credit is demanded to finance real economic transactions, namely for liquidity purposes and to finance working capital. The results of the short-term dynamics indicate that credit extension variables are the equilibrium variables, although the speed of adjustment parameter is found to be sluggish, which shows that the slow adjustment to equilibrium from shocks to the credit markets is attributable to the existence of stronger frictions and transaction costs in credit markets. These findings justify the persistent periods of credit overhang and short-falls in South Africa that this study derives from the equilibrium coefficient terms. The study shows that periods of credit overhang and short-falls are linked to the business cycle phases in South Africa