South Africans spend almost half of their income to pay off debt

South African consumers spend almost half of their income to pay off debt and are still credit stressed, although there has been significant improvement in the credit sector, giving rise to cautious optimism for the first time in years.

According to the Eighty20 2023 Q4 Credit Stress Report conducted in collaboration with Xpert Decision Systems (XDS) that outlines developments in the credit sector as well as its impact on the economic landscape, there were positive as well as negative indicators affecting credit.

Although the third quarter analysis brought a glimmer of hope to South Africa’s credit sector, this optimism was short-lived as the fourth quarter highlighted a blend of positive and negative indicators with the unemployment rate increasing slightly, inflation creeping up and consumer confidence dipping down again, Andrew Fulton, director at Eighty20, says.

Despite this, there was a significant improvement in the credit sector as the percentage of loans in arrears decreased by a full percentage point.

“Although our economy bounced back to its pre-Covid level in mid-2023, there was a 0.3% decline in gross domestic product during the third quarter, raising concerns that the country is at risk of a recession when the GDP figures were released on 5 March. The UK has already slipped into a technical recession and globally, the outlook remains bleak,” Fulton says.

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Middle class spends about 80% of income on paying debt

The analysis for the fourth quarter showed that the average ratio of monthly instalments to net income for all South Africans is currently at 47%, indicating that nearly half of the income of the average credit-active individual is allocated to debt servicing. Among the middle class, this ratio is nearing 80%, marking a 14.5% increase over the year.

Other developments in the fourth quarter included:

• This was the first quarter since the first quarter of 2020 where the average outstanding balances declined compared to the previous quarter. The decrease was 0.7%.
• Over the past two years, total loan balances for vehicle asset finance were declining among the middle class, resulting in 100 000 fewer middle-class individuals having vehicle financing loans during that timeframe.
• The total value of home loan balances experienced its first decrease since the onset of the Covid lockdown.
• In December retail sales delivered a surprise by increasing 2.7% year-on-year before inflation. However, overall, 2023 saw a 1% decline compared to 2022 in real terms. There were 1.25 million new retail loans in the fourth quarter.

All major listed banks acknowledged the impact of credit impairments on their 2023 financial results, Fulton points out. “African Bank revealed it had to double its provisions to account for bad debt, while Standard Bank noted that while its credit impairment charges had decelerated, they remained at elevated levels.”

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Banks and retailers stricter

Consequently, banks and retailers are adopting stricter measures in extending credit to new customers, alongside writing off overdue debts. Interestingly, Fulton says, this trend could account for the second consecutive quarter-on-quarter decline in the proportion of loans in arrears, currently standing at 36.4%, as banks eliminate bad debts from their records.

“These observations mirror trends evident in the credit data. It is the first quarter-on-quarter decrease in average outstanding balances since the first quarter of 2020. Moreover, both the total open loans and the count of credit-active individuals experienced a marginal 1% increase. Concurrently, overdue balances exhibited a reduction of 0.5%, amounting to R188.6 billion.

The data also shows that unsecured loans are growing, while larger secured loans are not, he says. “There were more than 600 000 net new loans in the fourth quarter, which reflected the trend of large loan products (home and car loan) typically reserved for the middle class, heavy hitters and comfortable retirees shrinking significantly. Conversely, there was also robust growth across the retail and unsecured loan sectors.”

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Vehicle finance and home loans under pressure

Fulton also points out that vehicle finance is under pressure, with a noticeable decline in the number of people opting for vehicle and asset finance compared to 2019. Year-on-year, these loan numbers have dipped by almost 1%, while total loan balances have seen less than 1% growth each quarter over the last three quarters, culminating in a year-on-year growth rate of 3.8%. Concurrently, overdue balances have decreased by 4%.

“This trend particularly affected the middle class, constituting approximately 30% of all these loans. Their loan balances have steadily decreased over the past two years, with a notable decrease of 100 000 individuals with loans in this segment during that period.”

Fulton says the home loan market is also struggling.

“While there has been a 6.4% growth in home loans by value, the total value of home loans decreased this quarter for the first time since the Covid lockdown. The number of home loan holders has grown by 1% year-on-year, with the number of home loans growing by 1.7%.  Average Instalments on home loans are up 13% and overdue balances by 56%.” 

He says roughly 200 000 new home loans are issued per year in South Africa. “The rate at which new loans are issued has been dropping, with new home loans as a percentage of credit active individuals showing a decrease of nearly 6% over the past two years. This is unlikely to change until interest rates come down, presumably in mid-2024.”

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Strategies South Africans using to prevent defaulting on debt?

According to the data, the average instalment-to-net monthly income ratio has been on the rise since the third quarter of 2021.

“These trends are fuelled by stagnant income growth and individuals responding to inflationary pressures and rising interest rates by seeking larger unsecured loans. It is important to exercise caution when drawing conclusions, as the debt-to-income ratio relies on predicted income, which may be less precise for both high-income earners and those with lower incomes, often reliant on cash transactions.”

“As we step into 2024, the outlook is still fragile, but it may not be as bleak as some might think. Echoing the sentiments of Adrian Gore, CEO of the Discovery Group, often the narrative about South Africa is significantly worse than the reality. There are signs of improvement and with cautious optimism, we can navigate towards a brighter economic future,” Fulton says.