Financial education for the people


By Thandisizwe Mgudlwa

A new study has found that local consumers are struggling to make ends meet.

South African consumers experienced severe strain on their cash flow during the second quarter of this year (Q2 2012).

This is evident from the MBD Credit Solutions/Bureau of Market Research (BMR) consumer financial vulnerability index (CFVI), which declined sharply from 58.9 points in the first quarter to 48.6 points in the second quarter.

The CFVI measures consumer financial vulnerability according to a scale where a score of ‘0’ indicates total consumer vulnerability while a score of ‘100’ indicates a score of total financial security.

And the decline means that consumers slipped from a ‘mildly exposed’ (to risks) cash flow position in Q1 2012 to being ‘very exposed’ in Q2 2012.

Accumulating past pressures and adverse international and domestic economic conditions have led to the cash woes of local consumers, the report also found.

According to Prof Bernadene de Clercq, head of the Personal Finance Research Unit at Unisa, the mounting pressure that consumers are presently facing in trying to balance their cash flow, can be compared to the stressful conditions of 2009 when they were confronted with multiple risks.

“These risks included job losses, high inflation and stagnating Gross Domestic product (GDP). As the correlation between the CFVI and real, seasonally adjusted and annualised GDP is 0.9, the decline in the index to ‘very exposed’ implies that the economy grew at a slow pace during April, May and June 2012.” says De Clercq.

The prof adds: “All four subcomponents of the CFVI lost ground during the second quarter. The savings index declined from 58.8 points in the first quarter to 47.5 in the second quarter; the expenditure index went from 60.1 points to 53.8; the debt servicing index dropped from 56.6 points to 47.8; and the income index from 57.6 points to 44.8.

“This means that consumers experienced that their cash flow – in terms of income, savings and debt serving – was very exposed to risks,” explains De Clercq.

In addition: “Their expenditure, though, was exposed to mild pressures only, as they were still able to complement their spending with new credit in order to honour expenditure commitments.”

However, not all consumers are equally vulnerable. There are winners and there are losers with respect to the level at which the economy benefits or disadvantages them, remarks Prof Carel van Aardt, Research Director of Unisa’s Bureau of Market Research.

“To determine who the winners are and who are the losers in a macro-economic context, it is necessary to identify the economic variables that cause consumers to become more or less vulnerable.

The Bureau achieved this by subjecting historical consumer financial vulnerability and macro-economic variables conjointly in a Vector Autoregression (VAR) model.

The model revealed the following chain of consumer cash flow vulnerability:

· Consumers are not able to afford their required necessities and become expenditure vulnerable;

· If they can’t generate more income to compensate, they become income vulnerable;

· They draw on their savings to finance the excess expenditure and become savings vulnerable;

· If they can’t afford the credit they used to finance their expenditure and have no savings left as contingency, they become vulnerable in terms of debt-servicing.

The model also clearly shows that the four subcomponents of the CFV Index- conjointly and in combination with price increases, the prime interest rate, the unemployment rate, household liabilities and household assets – explain almost 100% of the variance in each subcomponent.

“From this analysis it was possible to identify the cash flow “winners and losers” in a macro-economic context,” says Van Aardt.

Further: “Much can be done by the authorities in order to create more cash flow winners – and thus a more sustainable economic growth path.

Van Aardt believes the following interventions can go a long way in improving the way consumers handle their finances:

· Teaching people to manage their finances.

· Ensuring that people have labour market and entrepreneurial skills.

· Ensuring efficient and effective wealth transfer systems.

· Offering incentives for people to save while simultaneously discouraging unnecessary spending.

· Ensuring comprehensive price and debt management systems.

· Addressing unemployment head-on: mass re-education, flexible labour market, demand-supply linkages and FAS/SDB arrangements.

· Ensuring life-long asset growth through compulsory saving schemes.

· High-level financial education and easily accessible investment platforms.

· More efficient use of fiscal resources plus lower tax burdens.

· Effective and efficient governance.

Africa Business says, the government and the relevant authorities must team up to ensure that there’s massive roll out program on financial education and training, especially for the lower income earning classes. There’s clearly a need to develop the masses so they can join the upper classes and in the process eradicate poverty and underdevelopment.

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