Consumer credit health in ICU as prices continue to soar

Consumer credit health in South Africa is in ICU due to higher prices and there is a risk that it will deteriorate even further according to the TransUnion SA Consumer Credit Index (CCI) that fell the most on record in the second quarter to 49 from a final reading of 55 in the first quarter of 2022.

This reduction brings the index to its lowest level since the third quarter of 2020. The index is used to measure the credit health of consumers, where 50.0 is the breakeven level between improvement and deterioration.

The score of 49 suggests that household credit health deteriorated somewhat in the second quarter and the drop of six points is the sharpest fall in the index on record, even surpassing the five-point fall of the third quarter in 2020.

According to the index the components reflected a deterioration rather than further recovery in consumer credit health, with all four sub-components decreasing.

The index shows a considerable increase in credit card use, which is considered a measure of distressed borrowing, which suggests that consumers are leaning on credit to absorb the higher cost of living.

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Risk for retail sector

This is a risk for retail sector demand in the coming months, as higher debt constrains disposable income in the future. The data also shows that the average level of 3-month defaults rose year-on-year despite falling marginally (0.1%) quarter on quarter. This is an early warning for a looming slowdown in consumer sectors.

In addition, the index shows that household cash flow was under pressure, with prices increasing more than income. Considering that South Africa has one of the highest unemployment rates in the world, wage growth is unlikely to catch up to living costs for some time.

Rising prices suggest that real buying power is under pressure and without increased household income, the index is prone to deteriorate even further.

New credit defaults (accounts three months in arrears) rose by 1% in the second quarter compared to the second quarter of 2021 after contracting by 11% in the first quarter compared to the first quarter of 2021.

With interest rates rising into the third amid the higher cost of living, severe load shedding and low business investment, TransUnion says there appears to be heightened risk that the rate of defaults will increase in the months ahead as household incomes will remain flat-to-lower in real terms in the absence of significant wage increases from employers.

This is where distressed borrowing comes into play. TransUnion determines levels of distressed borrowing by looking at revolving credit (credit cards and store cards) used as a percentage of your credit limit.

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Increase in distressed borrowing

According to TransUnion data, distressed borrowing rose by 4% compared to the same time last year, from 3.9% y/y in the first quarter, accelerating from 1% year on year in the fourth quarter. Added to weak household cash flow, this implies that households seem to be using credit to offset higher living costs.

Household cash flow has felt the impact of accelerating price increases and moderate levels of nominal wage growth in recent months, with growth in real cash flow compressing from an average rate of 8.3% year-on-year over the third quarter of last year to a contraction of -0.3% year-on-year in the second quarter of 2022.

This was driven by a fall in the rate of growth of real cash savings balances by 0.8% year-on-year, while disposable income has barely grown since this time last year. The household cash flow outlook remained constrained by rising prices with non-discretionary inflation accelerating.

This also has an adverse impact on household debt serviceability. With the South African Reserve Bank opting to hike the repo rate by a total of 200 basis points (2 percentage points) between November of 2021 and July 2022, there will be increased debt serviceability pressures in the coming months, according to TransUnion.

The debt serviceability risk appears likely to increase, unless households manage their leverage exposure down effectively, as cash flow issues continue to persist due to macro factors.

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More tests ahead for household and consumer credit health

TransUnion says, therefore, rising interest rates, business uncertainty and high inflation suggest household credit health will continue to be tested. An uncertain outlook for the economy, low overall levels of business investment, various structural problems, such as the persistence of load shedding and port disruptions and more repo rate hikes, all suggest that the average household will be in trouble in the months ahead.

The SACCI business confidence index also decreased in the second quarter, suggesting that businesses are expecting a slowdown in activity. Consumer confidence levels have also been under pressure according to the FNB/BER consumer confidence index, with respondents becoming particularly pessimistic in terms of the survey’s outlook component.

TransUnion says consumers would benefit from being much more selective in taking on new debt and saving more where possible in their monthly budgets as reflected in the TransUnion Q2 2022 Consumer Pulse survey that indicated that 60% of households surveyed planned to curtail spending, with 73% of Generation X (people born around 1965-1985) cutting back on discretionary spending in the quarter.

With a prime interest rate expected to reach 10.25% by 2024, the average household will have a significantly higher interest burden unless households actively consolidated accounts, paid down debt and managed their expenses.