Debt levels keep climbing as net incomes decline

Two main trends have emerged regarding consumer debt levels in South Africa, according to the latest DebtBusters’ debt index for the second quarter of 2020 released on Monday.

Firstly, the index reveals a real-term decline in net incomes and secondly, consumers are supplementing this by increased unsecured lending.

“As a result of lack of growth in their net incomes, consumers find themselves in a corner and have been borrowing heavily, especially using unsecured loans, to make up the shortfall,” said Benay Sager, DebtBusters’ chief operating officer, in a statement.

Bigger earnings, bigger debt

Higher-income earners in South Africa in particular appear to have come under significant debt pressure, according to the debt index for the second quarter of 2020.

The increase in unsecured debt is, on average, 18% higher than it was four years ago. For consumers earning more than R10,000 per month, unsecured debt is 31% higher – for those earning R20,000 or more per month, unsecured debt levels are 42% higher than 2016 levels.

Consumers earning R20,000 or more a month had an unsustainable debt-to-income ratio of 138%. This is 12% more than during the same period in 2016.

The quarterly analysis by DebtBusters has been tracking client trends over the past four years.

“Although it’s impossible to determine the full impact of the hard lockdown based on just one quarter, the four-year-trend shows that for most consumers, debt levels are steadily increasing,” says Sager.

“This is because nominal incomes have been flat, so in real terms people have less income than in 2016, as inflation over the same period has been around 20% cumulatively.”

According to Berniece Hieckmann, head of GetUp, a new offering from financial services provider Metropolitan that includes debt consolidation and income protection, the backdrop of SA’s existing socio-economic landscape means the Covid-19 pandemic has the potential to financially cripple a generation of young South Africans at the very start of their professional journeys.

She points out that, while Covid-19 has had a devastating impact on the global population, young people, in particular, are anticipated to be one of the most significant casualties of the pandemic.

According to the International Labour Organisation (ILO), past recessions have shown that young individuals are usually first to be laid off work, while three out of four work in the informal economy, with little or no social protection. In addition, youth are over-represented in sectors ravaged by the pandemic, such as hospitality, retail and tourism.

“Our research revealed that debt is the lived reality of many millennials. As the financial burden on them increases, so is debt expected to mount – creating a trap that they may struggle to escape,” says Hieckmann.

Chief executive of FNB Easy, Philani Potwana, says to alleviate financial pressures, consumers should fully utilise the free benefits they receive from their banks. These benefits could free up much needed cash in consumers’ wallets, if taken advantage of.

These free benefits could include free cash withdrawals; prepaid airtime for free; free “send money” transactions; free card swipes; free app usage; free data, voice minutes and SMSs; free medical, legal and financial advice.

“Despite the prevailing challenges, we believe there’s an opportunity for all customers to get maximum value from their banking relationship,” says Potwana.

According to Investec chief economist Annabel Bishop, the lagged effect of the very severe lockdown the SA economy has experienced this year has started to come through in the data. The number of individuals losing their salaries over June fell by -20.7% year-on-year, according to the latest BankservAfrica data, while May saw a figure closer to -14% y/y and April around only -1.0% y/y.

The BankservAfrica Take-home Index (BTPI) records the majority of payments from large corporates and a fair number of medium-sized firms that are served by payroll service providers and firm-owned payroll administrators. Bishop points out that the recent decrease of the index may, therefore, not reflect the full impact of salary declines on small firms.

“In South Africa, state subsidies to low income earners have assisted households, and many high income earners and savers have managed to subsist on savings, but the middle income band has been severely affected, with many sliding into poverty, in turn contributing to further severe weakening in economic activity as demand has reduced,” says Bishop.

“The private sector is seeing markedly lower levels of renumeration overall this year compared to last year, while civil servants do not see this collapse, managing to avoid their salaries being reduced by and large, and instead even having agitated via unions for higher levels of renumeration despite the collapse in government’s tax revenues this year.”

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