Consumers can’t keep up

Cape Town – South African consumers are finding it harder to pay their debts. The latest TransUnion SA Consumer Credit Index (CCI) showed a sharp decline in the first quarter of 2016 – an indication that consumer credit behaviour is getting worse.

Source: TransUnion SA Consumer Credit Index

This is due to the twin problems of rising interest rates, which push up debt servicing costs, and higher inflation, which reduces household cash flows. The rate of credit accounts lapsing into default increased by 1.8% year on year.

The report measured 56.9 million active consumer credit accounts, and found that 1 million are now three months in arrears and a further 3.8 million are one month in arrears.  While the report noted that this is not yet a big problem and that it is coming off a low base, the trend is negative.

Source: TransUnion SA Consumer Credit Index

“A lot of things that had supported the index are no longer in play,” says Russell Lamberti, chief strategist at ETM Analytics, which developed the CCI in collaboration with TransUnion. “We had seen a positive trend in terms of household defaults slowing down, but that has turned around. We don’t have runaway inflation, but it has kicked back up again after dropping to very soft levels in early 2015. And we’re in a rising interest rate cycle.”

In an environment where the economy is weak, the country is struggling to create jobs, and South Africa is caught up in a global downturn, Lamberti also believes it’s difficult to see how things could turn around this year. However, he doesn’t see it reaching uncontrollable levels.

“It doesn’t look like we’re in a plummeting environment where things are rapidly deteriorating like we saw in 2008 and 2009,” he says. “This is not the same as what followed the global financial crisis.”

Structual fragility

The report also made a point of noting the latest South African Reserve Bank (Sarb) figure, which shows that national household bank debt as a percentage of disposable income is estimated at 77.8%.

“For South Africa this is too high and it is something to be concerned about,” says Lamberti. “It doesn’t represent a crisis in and of itself, but it creates a structural impediment to growth.”

Being under large amounts of debt limits people’s ability to take risk and also leaves them susceptible to serious financial problems if they lose their jobs. Particularly in South Africa where savings levels are very low, people don’t have buffers to protect them.

“The level here is certainly below the level of most developed countries, but of course we don’t have as much wealth and capital as those countries and our interest rates are a lot higher,” Lamberti says. “It does show that we’re a nation with a lot of debt and that creates a structural fragility in the household sector.”

A retail bubble?

The TransUnion CCI report also highlights that there are increasing signs of stress in retail credit markets. This is likely to have serious implications for retail sales in the country as retail sales volumes tend to follow the same trends as consumer credit health.

Expressing similar sentiment, a Standard Bank report released on Wednesday noted that: “high debt levels may be a threat for consumers in the context of rising cost of debt-servicing (we expect the Sarb to raise interest rates by a further 50 basis points this year); higher taxes coupled with our expectation of net job losses and slightly negative real wage growth in 2016.”

TransUnion points out that its analysis shows a marked slowdown in both the willingness of retailers to extend new credit, and the creditworthiness of customers. Total new retail accounts opened declined from around 350 000 in July 2013 to closer to 250 000 now.

Analysts have been warning for some time that pressure on the South African consumer will inevitably impact the retail environment, but so far retail sales have remained resilient. However, Larberti believes that the picture is now really starting to look quite different.

“The cycle is turning,” he says. “Retail sales did slow dramatically up to 2014, but then got a boost from the fact that we got a global deflation wave that spread through commodities, and inflation fell. The Reserve Bank was also very late to the rate hike party, so rates stayed low for quite some time. We also had the public sector wage bill growing very aggressively.”

However, all of those factors are now turning around.

“It has been a resilient sector,” says Lamberti. “You just have to look at some of the big shopping mall space coming on stream, and what’s been propping it up. But that story doesn’t last forever.

“I think retail is potentially in a bubble,” he concludes. “Calling the timing of that is always tricky, but I do think it’s starting to look different.”

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