A Credit Stress Report for the third quarter of 2022, released by analytics and research company Eighty20 in collaboration with credit bureau Xpert Decision Systems (XDS), highlights some alarming trends in the four most credit-active South African customer segments.
“At a macro level, the credit market is looking relatively resilient despite continued inflation and rising interest rates. Overall, total defaulters are down 3% from the third quarter of 2021 and total overdue balances are down 12%. However, a more detailed view of the credit market is showing large pockets of customers that are facing significant financial distress,” says Andrew Fulton, a director at Eighty20.
The prime lending rate increased by 3.25% over the last year, moving to 10.5%, which translates to a monthly repayment increase of more than R3,000 on a R1.5-million home loan. The report shows that home loan and vehicle asset finance (VAF) customers in the middle-class workers segment are under pressure, with the total value of these loans moving into default increasing by 20%. XDS data show that this segment includes 4.1 million adults typically earning R8,000 to R30,000 a month. Almost 75% of this segment are credit active and they are starting to show signs of significant credit stress as their incomes are no longer able to support their lifestyles.
Fulton points out that the average instalment-to-income ratio increased by nearly 9% over the last year to 66%, which means that two-thirds of the average middle-class salary goes to servicing debt.
Although owning property is no longer as easily achievable for the middle-class workers segment as in previous years, owning a car is the next big aspiration, with 25%, or 630,000, using VAF. The figures again paint a picture of financial distress, with 21% of vehicle asset finance balances going into default in the third quarter of the year, while the average repayment increased by 11% (R535) compared with the third quarter of 2021. On the home loan side, average bond repayments were up by 15% (R452) and 19% of home loans went into default for the first time.
At the bottom end of the income brackets, the mass-income market, made up of 11.9 million adults earning between R3,000 and R8,000 a month, is using unsecured, retail and credit card debt to make ends meet.
Visit Daily Maverick’s home page for more news, analysis and investigations
“Almost 80% of this segment is credit active and most (80%) are using retail credit (store cards such as Woolworths or Truworths), 32% are using unsecured credit (personal loans) and 16% have credit cards,” says Fulton.
Surprisingly, despite the high levels of unsecured debt, only 4% of unsecured loans in this segment went into default over the third quarter of the year. However, average credit card instalments climbed by an alarming 41% over the past year (R685 per month), with overdue balances going up by 26%.
Even South Africa’s most wealthy segment, the “heavy hitters”, has started to feel the pinch, with a 10% increase in home loan balances moving into default over the last quarter. This segment, which accounts for the wealthiest 5% of the population, earning between R30,000 to more than R120,000 a month, bought assets on credit while interest rates were low.
“Interest rate hikes together with high inflation are starting to put real financial pressure on the lower income subsegments of this segment, who have experienced an 18% increase in home loan balances going into default over the quarter. However, on the wealthier end of this spectrum, consumers appear relatively immune to current economic pressures, with new defaults staying flat or in fact improving across some credit products,” says Fulton.
Lara Hodes, an economist at Investec Bank, says growth in household consumption expenditure, which comprises about 60% of GDP, is likely to be modest in the medium term.
“Balance sheets of many households remain constrained, with administered price increases a persistent pressure. Moreover, consumer confidence remains subdued with sluggish reform implementation and electricity supply concerns … weighing on sentiment and the country’s economic growth prospects,” she says.
Weihan Sun, director of financial services research at the credit bureau TransUnion Africa, says the increased credit appetite can be attributed to the increased costs of living and consumer essentials, which are in turn driven by high fuel prices and international sociopolitical pressures.
TransUnion reports that clothing accounts and retail revolving accounts saw higher new account limit amounts, probably due to increased product costs driven by the high inflation rate, while bank and non-bank personal loans and vehicle asset finance also saw increased opening amounts.
“Higher bank and non-bank personal loan opening balances could be driven by consumers needing to supplement their regular income in the current pressured economic climate,” says Sun.
The South African Reserve Bank is expected to continue raising interest rates into 2023, painting a bleak picture for consumers going into the new year. At the last Monetary Policy Committee meeting in November, Lesetja Kganyago, the governor of the SA Reserve Bank, noted that fuel price inflation for 2023 was forecast at 0.8% after increasing by 33.3% in 2022.
“Local electricity price inflation is slightly higher at 10.7% in 2022 and 9.0% in 2023. Global food price inflation has declined. However, local food price inflation is revised up, due in part to the weaker exchange rate, and is now 6.2% in 2023,” he said. DM/BM
