Examining the relationship between household debt and economic performance in South Africa
Date
2023-02
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Witwatersrand, Johannesburg
Abstract
High level of debt has been a major concern in the South Africa recent times. The prevalence of high debt levels hinders savings and investments, thus exerting a detrimental influence on economic growth. This surge in debt can be attributed to the consumer boom experienced in the past decade and the recent proliferation of credit cards, which have made it easier for consumers to access goods and services. This study evaluates the link between household debt and economic performance and characterises the implications of changes in household debt on economic growth in South Africa using the Toda Yamamoto VAR framework, using quarterly data covering the period 2008Q1 to 2022Q2. The connection between household debt and economic growth lies in the Life Cycle Hypothesis. The following findings are discernible from the analysis. First, the study finds that there is a bi-directional relationship between economic growth and mortgage loans and a unidirectional relationship between economic growth and household debt to disposable income ratio. Second, household debt to disposable income has a significant impact on economic growth, whilst the debt service ratio insignificantly affects economic growth with a smaller margin. Third, economic growth responds positively to mortgage loans, while a positive response to household debt exists which is transitory and positive. These results suggest that policymakers should encourage economic agents to take mortgage loans to boost economic growth in the short run. Household debt may be used to boost the economy in the short run but may deter economic growth in the long run. In the meantime, nothing maybe be done in items of debt service ratio as it has no significant impact, however, constant monitoring may be applied to avoid creeping in of debt overhang in the future. Access to household debt should be monitored and controlled since high debt significantly impacts economic growth in the long run
Description
A Research Report (CODE: ECON7008A) submitted in partial fulfillment of Master of Commerce in Economics (CCA01) in the School of Economics and Finance, University of the Witwatersrand, 2023
Keywords
Economic growth, Househol debt, Mortgage loans, Debt service ratio, Household debt to income ratio, UCTD
Citation
Karombe, Stephen. (2023). Title: examining the relationship between household debt and economic performance in South Africa [Master’s dissertation, University of the Witwatersrand, Johannesburg]. WireDSpace. https://hdl.handle.net/10539/38801