Assessing consumer financial vulnerability, index shows strain

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.

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.

CFVI and its sub-indices over time

Stressful times

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, he says.

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. 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," he concludes.

Winners, losers

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, says Prof Carel van Aardt, research director of BMR.

To determine these are 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 Auto Regression (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 cannot 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 cannot 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. These are categorized in the following table:

Winners

• Higher income groups
  
• Consumers paying low interest rates and with a low debt ratio
  
• Higher skilled and civil servants
  
• Consumers with an affordable debt to disposable income ratio
  
• Consumers with a high solvency ratio
  
• The employed
  
• Consumers with well-developed personal financial skills

Losers

• Lower income groups
  
• Consumers paying high interest rates and with a high debt ratio
  
• Lower skilled and private sector employees
  
• Consumers with a high debt to disposable income ratio
  
• Consumers with a low solvency ratio
  
• The unemployed
  
• Little knowledge about managing own finances

Interventions needed

The authorities can do much in order to create more cash flow winners and thus a more sustainable economic growth path. Prof 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

Difference between consumer financial vulnerability and household financial wellness

There is confusion regarding the difference between the MBD Credit Solutions/BMR Consumer Financial Vulnerability Index and the Momentum/Unisa Financial Wellness Index. Some analysts view this as different sides of the same coin, but they are two different concepts with different meanings. The following is a brief description of the differences between the two indices:

CFVI focuses on the cash flow of consumers with the aim of determining whether they are able to cope financially or not. The index analyses consumers' experience and sense of pressures on their income, expenditure, savings and debt service. International and domestic events increase/decrease these pressures on a continual basis.

The Financial Wellness Index measures the types of capital necessary for being/becoming financially well or unwell over time. The types of capital include:

1. Physical capital (net income earning ability and receipt thereof)

2. Asset capital (asset generation ability)
   
3. Human capital (education and skills)
   
4. Environmental capital (living environment)
   
5. Social capital (social network)
   

The CFVI is a short-term indicator while the Wellness Index is a long-term measurement tool and it is possible to be 'financially vulnerable yet 'financially well' at the same time and vice versa.

Definitions

• Financially vulnerable: Consumer cash flow being affected to such extent that it creates an actual experience and/or sense of being financially insecure and/or an unable to cope financially
  
• Financially exposed: Cash flow position affected to such extent that it creates a high risk of becoming financially vulnerable
  
• Financially secure: Cash flow position is under control, with little threat of becoming financially vulnerable