Determinants of Financial Intermediation in the SACU Countries: Preliminary Evidence From a Panel Data Analysis

Abstract

The study explores empirically five macroeconomic determinants of financial intermediation, namely: growth in income, level of real income, inflation rate, exchange rate and interest rate spread in five SACU countries. Employing four measures of financial intermediation, an equilibrium model of financial intermediation was estimated using a system seemingly unrelated regression panel estimator. The fixed effect and country-specific coefficients were obtained and interpreted. The level of income and exchange rate were the most important determinants of financial intermediation among the countries. In line with theoretical models, which indicate that the level of economic growth can accelerate the process of financial intermediation, in three of the countries – Botswana, Namibia and South Africa, a very significant positive relationship between level of income and the indexes of financial intermediation was observed. But for Lesotho and Swaziland, a reverse relationship was obtained. This may be due to negative externalities from the more developed financial sectors of South Africa resulting from the economic and monetary integration. The results on the exchange rate highlight the need for a stable and predictable exchange rate policy in order to stimulate financial intermediation. Also, the results confirm the potential for inflation to negatively affect financial intermediation. Lastly, the results relating to interest rate spread highlight how high levels of the spread can prevent deep financial intermediation.

Notes

1 Apart from belonging to Customs Union, four of the countries-Lesotho, Namibia, South Africa and Swaziland are members of the common monetary area (CMA), which require convergence in their monetary and financial policies. The SACU and CMA allow for free movement of goods, labour and funds. Also, the CMA arrangement mean single exchange rate, with the currencies of the other countries pegged at par to the South African rand, and the rand freely circulating in the other economies. Thus the SACU countries may be affected by the same shock

2 Contemporaneous correlation occurs when the disturbance terms in a set of equations are correlated at a point in time.