Abstract
Abstract : Since the 2007/8 global financial crisis, common factors such as low and protracted global interest rates may have sustained rising debt levels in emerging market and developing economies (EMDEs) like South Africa. This mini-dissertation attempts to characterise the South African financial cycle so as to determine the role of common global factors that potentially drive South African debt levels. First, the South African credit-to-GDP gap is constructed using the Hodrick-Prescott (HP) filter to determine the role of private sector credit frictions in generating domestic credit procyclicality. Next, a dynamic factor model is used to characterise the South African financial cycle with 13 macro-financial variables from 1980 to 2016. The South African financial cycle is then decomposed to determine the driving forces, and then compared to the Miranda-Aggripino and Rey (2018) global financial cycle and the VIX, to disentangle the effects of common global from idiosyncratic factors. The results reveal that the South African credit cycle is weakly countercyclical, suggesting the domestic business cycle may lead credit growth. Additionally, the South African financial cycle is driven mainly by common movements in the funding, credit, equity and global markets. Moreover, moderate positive co-movement with the global financial cycle, and stronger negative co-movement with the VIX, suggests the South African financial cycle is not isolated from common global factors. Therefore, we can infer that South African post-crisis debt growth may be a symptom of low and protracted global interest rates over the period. Based on these results, policymakers are advised to consider targeted macroprudential measures, such as balance sheet stress testing and macroprudential levies, to manage specific vulnerabilities.
M.Com. (Development Economics)