Following the recent increase of South African interest rates, the tenth consecutive rise as reported by Bloomberg, the economy remains in a difficult position, affecting consumer borrowing and spending, with hopes that these central bank measures will prove effective in controlling inflation.
Base rates are expected to rise another 25 points next month, despite an easing of consumer price inflation recorded in May, as the bank attempts to achieve disinflation faster.
What does this mean for the wider economy, and how is inflation, increasing living costs and higher interest rates affecting the broader credit market?
Consumer Spending Trends in South Africa
The largest outgoing category for most households, across the scope of income levels and affluence, is groceries.
Food inflation hit 14% at the end of March and is currently hovering at roughly 11.8%, but it is still making everyday goods harder to afford.
With a disproportionate impact on the lowest earners, the cost for basic provisions is now costing as much as 50% more than the same time a year ago, making it less viable for many to consider additional spending on luxury items, or things like eating out, travel, and festivities.
James Williams, Head of Marketing at leading online credit lender Wonga, says, “Over the next festive season, we expect South African residents to spend over R.226 billion, based on our recent survey of 8,500 customers.
However, spending per household has decreased by 11%, primarily due to drops in disposable income putting pressure on non-essential expenditure.”
Increases in Use of Buy Now Pay Later
One of the outcomes is that more shoppers are using credit to cover the cost of discretionary purchases, including homeware and clothing, creating a potentially dangerous environment where wages are becoming less valuable due to inflation, and yet take-up of credit lending is high.
Credit sales recorded by clothing retailer Mr Price rose by 8.3% in the year to April 2023, with applications for credit accounts jumping by 30.9% year-on-year – combined with a spike in bad debts from 6% to 8.4%.
Inflation has begun to dip, presenting a cause for optimism. Still, the relentless pace of interest rate rises, growing prevalence of electricity blackouts and resilient inflation have yet to reverse at the speed many would like to see.
Growth in Reliance on Short-Term Debt
One of the biggest concerns in the South African credit market is a dependency on debt to cover everyday outgoings, with a further 200,000 people taking out credit borrowing – a rise of just over 30%, accounting for R.9.3 billion in loan debt.
In some cases, these debts are linked to retail credit and reflect a similar picture reported by Mr Price, where consumers within income brackets of R.3,000 to R.8,000 per month are the main demographic using credit to make day-to-day purchases.
However, debt reliance is not reserved for lower-income groups, and middle-income earners with monthly wages of an average of R.15,000 per month are also using short-term credit card borrowing to maintain their lifestyles.
Borrowing is up 10% in this area, with an increase of 17% of consumers experiencing new defaults on credit card repayments, with a more concerning picture in home loans and vehicle financing agreements where defaults are at highs of 18% and 30%.
The advice for any consumer struggling to make repayments or experiencing financial distress is to contact their lender at their earliest convenience to discuss the support mechanisms available.
While consumer confidence has clearly suffered a blow over recent months, the PwC South Africa report points to signs of increasing stability, noting that in the last six months, some shopping habits have begun to resume, including purchasing non-groceries via mobile.
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