Covid credit bubble about to burst, to detriment of many South Africans

The Covid credit bubble is about to burst, despite consumers still being over-indebted and many are still unable to earn a consistent income.

South Africans’ dependency on credit in a pandemic-fuelled world could be our downfall if we fail to get it under control.

This stern warning comes from Momentum financial adviser Janine Horn, who says after the Budget Speech, South Africans are already preparing for a broad range of price increases as taxes, inflation, interest rates and rising food prices will start to increase the cost of living to unmanageable heights.

Although we anticipate these inevitable outcomes every year, this year is different as something else is looming over our bank accounts: rampant inflation growth. Covid-19 seemed to create a credit bubble as our month-to-month relationship with interest rates and inflation was disrupted.

“We lived in limbo for a while before prices skyrocketed all of a sudden as demand for goods outstrips the capacity of the global supply chain. The Covid-19 credit bubble is about to burst and we are now facing the realities of rampant inflation growth.”

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How did we create the Covid credit bubble?

As prices increase, so does inflation. As it gets harder to maintain a lifestyle, consumers dip into their credit cards, but this only exacerbates the problem, as one of the methods to curb inflation is to make credit more expensive.

Horn says we are now sitting in a vicious cycle of cost and we need to come to terms with reality before it is too late.

“Consumers became cash strapped at the height of the pandemic. Demand for goods decreased to record lows and with less money to spend, it was in government’s interest to keep inflation and interest rates low for an extended period of time.

“This meant that credit was relatively cheap and considering the fluctuating levels of income consumers experienced, credit was the only way forward.”

She says once people used credit to pull themselves out of the Covid-19 hole, markets began clawing their way back to normal and although we are not quite there yet, it seems that markets are bouncing back quicker than the ability of many people to earn an income.

“If we now start to increase the price of credit by readjusting inflation levels, which is inevitable at this point, the Covid-19 credit bubble will burst and consumers will be left in financial trouble. The same thing is happening all over the world.” 

Horn says consumers are now feeling so financially exposed, insecure and vulnerable that any small market change, such as interest rate hikes, will impact the state of personal finances in this country in a negative way.

“We face record levels of unemployment, a stagnant economy focused on recovery and the price of fuel and therefore food while our income levels remain at risk. Now we have to pay more on our debt, including our credit cards, houses, cars, businesses and anything in between that we borrowed money for.”

ALSO READ: Unemployment levels remain major barrier to financial freedom – study

Can we escape the Covid credit bubble?

However, she says it is not a complete dead-end for consumers and there are avenues left to explore for many South Africans who feel trapped. Consumers can, for example, consider debt consolidation loan with lower monthly instalments and interest rates.

“While you should assume that you have no way out, there are many roads to travel depending on their situation, which is why people need to consider talking to a financial adviser who can help them to draw up a robust and achievable financial plan based on current circumstances and realities.”