Major interest rate relief hasn’t stopped SA households tightening their belts – Reserve Bank

In response to the impact of the Covid-19 lockdown, the Reserve Bank has rolled out a number of measures to introduce liquidity to markets and enable banks to lend more. However, households have been playing it safe, demanding less credit as they brave the uncertain future.

According to the Reserve Bank’s June 2020 Quarterly Bulletin, released on Thursday, growth in total loans and advances from financial institutions was “fairly muted” earlier this year. This despite the bank providing “substantial” interest rate relief – it has cut rates by 275 basis points so far, greater than the 100 basis points median of emerging markets.

The repo rate of 3.75% is the lowest its been since 1973, according to the Reserve Bank.

“Credit extension to the household sector slowed, with demand for credit affected by consumers’ inability to spend on non-essential products and services, together with uncertain job prospects and rising unemployment,” the report read.

The labour market was already taking a knock in the last quarter of 2019 as the economy has been in a recession from the third quarter of that year. There are expectations of increasing job losses as a result of the national lockdown, which halted non-essential economic activity when it was first implemented in March 2020. The latest unemployment statistics are at a high of 30.1%.

Also read: Govt’s loan guarantee scheme ‘not working, needs SMME funders’

However, with the implementation of the national lockdown in March, the corporate sector has increasingly been relying on bank funding. The Reserve Bank, in partnership with Treasury and commercial banks, has set up a R100 billion credit guarantee scheme for small businesses. About 10% of these loans have been extended.

The Banking Association of South Africa has said that the practical administrative aspects of the scheme are being revised to increase access to the loans, Fin24 previously reported.

Meanwhile, credit extension to the corporate sector bounced back from a contraction of R5.5 billion in the fourth quarter of 2019 to an increase of R58.3 billion in the first quarter of 2020. This is the largest quarterly increase since the first quarter of 2016, the SARB report read.

Property development, consumer goods manufacturing, mining, and resource companies increased their demand for working capital – which saw a boost to loans.

The Reserve Bank noted that the uncertainty of the lockdown and subsequent financial volatility impacted companies differently. For example, demand for loans by non-financial companies slowed after May; in contrast, demand for loans by financial companies slowed in the first quarter but then picked up in April and May.

Demand for general loans to companies was substantially lower in January, compared to the previous year, but then picked up in March for expenditure and working capital, but then slowed down again in May.

The report also indicates that SA reported its largest trade surplus since the fourth quarter in 2020. The trade surplus of the first quarter of 2020 was 4% of GDP, and was attributable to the increase in the value of gold and merchandise exports, coupled with a decrease in merchandise imports.

The country also recorded its first surplus for its current account of the balance of payments, since the first quarter of 2003. The balance switched from a deficit of 1.3% of GDP in the fourth quarter of 2019 to a surplus of 1.3% in the first quarter of 2020.

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