EFFECT OF DIFFERENT COMPONENTS OF COUNTRY RISK ON CREDIT EXTENSION IN SOUTH AFRICA

Year 2017, Volume: 9 Issue: 2, 152 - 166, 01.06.2017

Paul-francois Muzindutsi Rethabile Nhlapho

Abstract

There is a growing concern about the impact of country risk rating on financial
institutions due to increased political, financial and economic risk. This study
utilizes the autoregressive distributed lag (ARDL) model and the Toda–
Yamamoto approach of Granger causality test to analyse the long and short
run effects of economic, financial and political components of country risk on
credit extended to the South African private sector. The results indicate that
there is a negative long-run relationship between credit extension and
country risk. In the short-run, credit extension is mainly affected by its
previous changes, with a limited effect from financial and economic risks.
The causality analysis showed that previous changes in country risks do not
Granger-cause changes in current credit extension, but that credit extension
Granger-causes the economic and financial risks. The study concluded that
changes in country risk have a long-term implication on credit extended to the
South African private sector.

Keywords

Credit extension, country risk, economic risk, financial risk, political risk, ARDL, South Africa