Political issues becoming a growing risk to your personal finances

Political issues becoming a growing risk to consumer finances, making consumers more vulnerable.

Consumer vulnerability is demonstrated by the fact that consumers say their finances affect their relationships and dominate their thoughts, causing them to neglect other important issues. The same old culprits, load shedding and political issues affected consumer finances negatively.

A total of 85.1% of respondents said their financial problems affect their relationships and 81.2% said they are constantly thinking about their financial problems. However, they are empowered by setting financial goals to make better financial decisions that will reduce their financial vulnerability.

Although the overall state of South African consumer finances improved slightly in the third quarter of 2022, it remained under pressure according to the Momentum-Unisa Consumer Financial Vulnerability Index (CFVI), that increased from 48.9 points in the second quarter to a still sub-par 49.7 points in the third quarter.

The index is produced in partnership with Unisa as part of Momentum’s Science of Success campaign to provide South Africans with information and strategies on how they can accelerate their journey to financial success.

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What is consumer financial vulnerability?

The term ‘consumer financial vulnerability’ implies that consumers experience a sense of financial insecurity or an inability to cope financially. The index provides a window into the psyche of consumers and the extent to which they feel vulnerable about their income, expenditure, savings and debt servicing capabilities.

Increasing food prices, load shedding and high fuel prices, as well as political instability and corruption, posed the highest risk to consumer finances according to the key informants who deal with consumers daily. They expect the risk factors to continue in the fourth quarter, but in a different order. The fastest climbing risk factor is politicians not focusing on consumer needs.

Although the Index mainly moved sideways, it improved on the margin in all four subcomponents, suggesting that households should make a stronger contribution to economic growth in the third quarter and may contribute more to positive economic growth following a contraction in the second quarter.

The Index shows a slight improvement in consumer financial vulnerability at 49.7 points compared to the 48.9 points of the second quarter, implying that the state of consumer finances remained in a very exposed state of financial vulnerability. However, despite the recovery, the index was still worse than a year ago when it stood at 50.3 points.

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Why was there an improvement in consumer finances?

Analysis of the insights gained reveal the main reason for the slight improvement in consumer state of vulnerability is the increase in the income subindex to 51 points from 49.8. Changes in the sub index scores were due to more consumers being able to access other sources of income, such as transfers from family and friends and this improved income contributed to slightly less expenditure vulnerability.

However, high consumer price inflation, particularly from increasing food and fuel prices, as well as higher interest rates, left consumers under pressure and curtailed their ability to afford their normal purchases, forcing them to cut back.

Although consumers were marginally less savings vulnerable, pressures from increasing consumer price inflation and rising interest rates contributed to a less money available for savings and as before, paying their debts remained consumers’ ‘Achilles heel’ as rising consumer price inflation and interest rates considerably reduced their ability to repay debt.

Risk factors affecting consumer finances are increasing food prices, load shedding, high fuel prices, political instability and corruption, persistent unemployment, poverty and inequality, higher municipal tariffs, low economic growth and higher interest rates.

Other risks include the war in Ukraine, no political focus on consumer needs, weak service delivery, changes in exchange rate, high personal income tax and lower business confidence. The perceived increase in risk to consumer finances due to political instability and corruption was the largest change between the two quarters. In the second quarter it was sixth and in the third quarter fourth.

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Expectations for consumer finances

Expectations for the economic environment and consumer finances in the fourth quarter are:

• The overwhelming majority of key informants (72.5%) expect consumer price inflation to still increase at a rapid pace in the fourth quarter.
• The global and South African economies are also expected to get worse in the fourth quarter.
• 51.0% anticipate that the level of unemployment will increase, while an additional 32.4% expect it will remain at the current high levels.
• 74.5% of key informants think it will take an additional 2 years for consumer finances to recover from the impact of the pandemic and lockdown.
• 50.5% expect consumer finances to deteriorate during the fourth quarter.
• 72.5% expect a rapid increase in price in the fourth quarter.
• 56.9% expect the economy will perform worse in the fourth quarter.

The same top four risks are expected in the fourth quarter, but in a different order. Load shedding and political instability and corruption is expected to have the biggest influence on consumer finances, followed by increasing food and fuel prices, but the biggest “risk mover” is political focus differing from consumer needs.