The Impact of Climate-Induced Macroeconomic Instability on Financial Sector Dynamics in South Africa: Evidence from an Econometric Framework

Climate change is increasingly seen as a risk to the economy and financial systems. This is because weather patterns can affect how much people produce, inflation, trade, investment and how well the financial sector performs. These effects are especially important in developing countries that are sensitive to climate change. Even though there is growing research linking climate and finance, there is still no solid evidence on how climate, economic factors, and financial development are connected in South Africa. This study looks at these links using data from 1972 to 2023. It focuses on financial-sector development, which is measured by the amount of credit given to the private sector as a share of GDP. The study also includes other factors: total annual rainfall, temperature, trade openness, inflation and human development. To analyse the data, the researchers use the ARDL model developed by Pesaran, Shin and Smith in 2001. This model helps to find both long-run relationships and short-run movements between the variables. The results show a long-run relationship among the variables in the model. In this term, trade openness has a negative and statistically significant effect on financial-sector development (coefficient = −1.7548, p = 0.0260). Inflation also has a significant effect (coefficient = −0.0207, p = 0.0128). Temperature is positively and significantly associated with financial-sector development in the model (coefficient = 11.0507, p = 0.0098), but this result should be interpreted with caution. This is because temperature was transformed using a logarithm and measured in degrees Celsius, and there could be shared long-term trends affecting the results. Rainfall and human development do not show significant long-term effects. In the run, improvements in human development are positively and significantly tied to changes in financial-sector development (coefficient = 5.0723, p = 0.0005). Inflation changes also have a significant short-run effect (coefficient = −0.0152, p = 0.0005). The short-run effect of trade openness is not statistically significant. The error-correction term is negative and significant (−0.3513, p < 0.001), meaning that 35.1% of any imbalance from the long-run equilibrium is corrected within one year. Overall, the findings suggest that climate, macroeconomic and financial factors are linked in South Africa but not through strong structural causes. Instead, the relationships appear to be conditional and influenced by a mix of factors.