COMMODITY PRICE SHOCKS AND FINANCIAL SECTOR STABILITY IN COMMODITY DEPENDENT COUNTRIES IN SOUTHERN AFRICA

Abstract

This paper examines the impact of negative commodity price shocks on financial sector stability in selected Southern African countries, namely Angola, Botswana, Mozambique, Namibia, Tanzania, Zambia and Zimbabwe. Using multivariate panel data regression analysis, with fixed effects from 2000 to 2015, the study shows that commodity price downturns result in increased non-performing loans and reduced bank profitability. Specifically, negative commodity price shocks reduce profitability as measured by the return on assets and return on equity. In addition, the study shows that there is an adverse impact on financial sector conditions, using a financial condition index as a proxy. The index was derived from a combination of measures of non-performing loans, return on assets and regulatory capital adequacy ratios, using a three variable dynamic factor model. The main transmission mechanisms through which commodity prices shocks affect financial stability are GDP growth, fiscal revenue, savings and the size of the fiscal deficit.