Credit demand declined even further in November

Credit demand in South Africa declined even further in November due to a significant deceleration in home loans as well as other loans and advances, which are mainly made up of unsecured lending to companies and households.

Home loan growth dipped to 3.8% compared to a year ago from 4.3% in October, while other loans and advances slowed to 3.3% from 3.7%. In contrast, installment sales and leasing finance, used for vehicle purchases, remained resilient, accelerating to 9.7% from 9.4%, the economists at the Nedbank Group Economic Unit say.

They point out that household and corporate credit demand deteriorated further in November as tight monetary policy and persistent infrastructure constraints weighed on confidence and economic activity.

Household loans grew by a moderate 4.8%, down from 5.2% in October. Total corporate credit improved slightly to 3.1% from 2.9%, mainly reflecting the softer rate of decline in bills and investments.

However, excluding this category, growth in company loans slowed significantly to a weak 3.9% compared to a year ago from 4.2% previously.

In the household market, the weakness came mainly from a significant deceleration in home loans and personal loans, the economists say. Home loan growth slowed to 4% from 4.7%, while personal loans eased to 3.5% from 3.9%.

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Consumers buy cars and spend on Black Friday – on credit

In contrast, vehicle finance held steady, growing by an unchanged 7% compared to a year ago, while transactional credit demand remained relatively resilient. Households also refrained from drawing down overdrafts, which increased by only 0.3% year-on-year, but consumers continued to rely on credit cards to sustain spending, which was amplified by Black Friday and Cyber Monday promotions.

“As a result, the economists say, credit card growth increased slightly to 9.1% in November from 9% in October, but household credit demand is still waning as falling asset prices, higher interest rates and relatively poor economic prospects erode household confidence, incomes, and balance sheets.”

At the same time, the economists say, commercial banks are more cautious about extending credit given these vulnerabilities and rising defaults, reinforcing the cyclical downturn in credit growth.

Growth in broad money supply (M3) also slowed to 5.5% year-on-year in November, down from 6.1% in October, with the drag due to declines in net other assets of R36.4 billion and net claims on the government sector of R818 million.

All other components increased over the month, with net foreign assets up by R55.9 billion and net claims on the private sector up by a modest R16.3 billion.

Private sector credit extension (PSCE) growth weakened to 3.8% year-on-year in November from 3.9% in October, worse than the Nedbank economists’ forecast of a slight uptick to 4.1%. The bills and investments category also contracted for the sixth consecutive month, shrinking by 1.8% year-on-year, although less severe than the 4.1% drop recorded in October.

The Nedbank economists say, excluding this volatile category, growth in loans and advances slowed to 4.3% from 4.7%, against their forecast of only slightly softer growth of 4.6%.

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Corporate credit not doing so great either

In the corporate market, the drag came from the continued slowdown in commercial mortgages and general loans. Growth in mortgages moderated to 3.2% from 3.5%, reflecting the impact of weak economic activity on demand for residential and non-residential property, the economists say.

Growth in general loans, which account for just over 53% of company loans, slowed to only 2.9% from 3.5%. “The dramatic slowdown in this category is somewhat exaggerated by 2022’s high base but nonetheless points to weaker fixed investment activity.”

Until recently, they point out, general loans were propped up by robust activity in the renewable energy industry, propelled by the need to find alternative electricity sources amid severe power outages and by the government’s renewable energy programme and structural reforms in electricity generation.

However, this boost now appears to be fading. Besides mortgages and general loans, overdrafts remained subdued, and credit card growth softened. The only outlier was installment sales and leasing finance, which jumped to a robust 15.2% year-on-year after accelerating to 14.3% in October from 13.7% in September.

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Boost thanks to online shopping and collapse of rail

The Nedbank economists say the remarkable resilience in this category probably reflects two key developments:

• The growing shift towards online shopping, which creates demand for a fleet of vehicles, and
• the collapse of rail transport, which also boosts vehicle demand as more goods must be transported by road.

They say the slowdown in credit demand is likely to continue and broaden into the first half of 2024. “Both household and corporate credit demand will weaken further. On the household side, the cumulative impact of the interest rate hikes will continue to filter through the economy, keeping debt service costs high and compelling households to be cautious of borrowing and spending.”

At the same time, they say, banks will be wary of extending loans given the rising debt defaults.

“Corporate demand will continue to be supported by renewable energy projects. However, the upside will be contained by fading profits and high operational costs, which will likely convince many companies to trim large capital expenditure plans. We expect credit growth to improve gradually during the second half of next year as the interest rates ease and the economy recovers slightly.”