Consumer’s Credit Binge Causes Indigestion

John Vaughan (Financial Advisor) @ Lucid Living

While there are reasons to feel optimistic about the recovery in the domestic economy, we’re going to look at a reason to feel anxious about that recovery, namely, the precarious state of South Africa’s consumers.

Now, don’t get me wrong. It’s absolutely true that consumers are in a better position now than they were at the low ebb of South Africa’s recession in 2008/9. However, “better” is not quite the same thing as “great”.
There are, in fact, some major problems facing South African consumers, and these problems threaten to undermine the progress the economy has made.

The most serious problem is the extent of consumer indebtedness. There can be little doubt that South Africans have been on a credit binge over the last few years. Although consumers’ debt-to-disposable-income ratio has improved over the last 18 months or so, according to Stanlib economist Kevin Lings, this is more the result of rising income than of falling debt.

Notes Lings, “In the fourth quarter of 2010, the ratio of household debt to disposable income eased to 77.6% compared with 78.7% in the third quarter, and a recent peak of 82.0% in the second quarter of 2008.

The steady reduction in the debt to income ratio partly reflects the fact that consumers has become more cautious around debt, but also the fact that household incomes have risen.

The point is that, while South Africans’ debt-to-disposable income ratios have improved, this does not mean that they have reduced their debt; incomes have simply grown faster than debt, and thus made it appear as if debt levels were falling, when in fact debt has continued to rise.

Looking ahead, it’s unrealistic to expect that household income will continue to grow fast enough to keep reducing consumers’ debt burden.

As interest rates and inflation begin to rise towards the end of this year, wage increases will be more subdued, and debts will begin to weigh more heavily on consumers as their monthly instalments increase with rising rates.
This does not bode well for borrowers.

Already, with rates at their lowest levels in decades, high levels of debt are having a negative effect and a lot of South Africans have credit problems. The most recent data from the National Credit Regulator indicate that there are a great number of people struggling to properly manage their debt.

The proportion of consumers with good credit records has steadily declined since 2008, while the proportion of impaired records, adverse listings, and judgments and administrative orders has grown.

What’s worse, this situation is likely to worsen over time.

This is bad news. The South African economy is heavily reliant on consumer spending – according to Sheshi Kaniki, senior economist at Momentum, consumption expenditure accounts for about 60% of GDP, so when consumers don’t spend, the economy suffers.

Obviously, the state of South Africa’s consumers is a problem, and one that can only be alleviated by those consumers taking a proactive approach to reducing their debt levels. Unfortunately, there is little evidence that this is happening, and little likelihood of it happening in the future.

Overall, South Africans have poor financial habits. South Africans’ marginal propensity to consume (this is measure of what percentage of each additional rand of disposable income a person is likely to spend) is basically 100%, meaning that South Africans spend virtually every additional rand of disposable income that they earn, and save none of it. The national savings rate, per Reserve Bank data, is effectively 0%.

These habits of overspending, over-borrowing, and under-saving are deeply entrenched, and very hard to change. But unless South African households start to manage their money better, the country’s fragile recovery could face a serious challenge.