Rough ride ahead

2013-10-15 00:00

FOUR reports have found that consumers are in for a rough ride that may translate into more consumers falling deeper into the debt trap.

Neil Roets, CEO of one of South Africa’s largest debt-counselling firms, Debt Rescue, said yesterday that the latest reports by the International Monetary Fund (IMF), World Bank, South African Reserve Bank and the Trans­Union Consumer Credit Index, all found that consumer debt levels are high and rising. “They largely concur that the South African economy is slowing down and that debt levels are skyrocketing, which all translates into a very bleak future for deeply indebted consumers,” Roets said.

This is in contrast to recent research by Gordon Institute of Business Science economist Roelof Botha, and University of Johannesburg economist Ilse Botha, which shows that credit plays an important role in the economy and that there is no credit bubble.

Their research shows that poor access to credit could translate into lower standards of living, and some unsecured lending was used for working capital for smaller enterprises. It said credit-growth figures are seldom expressed in average annual real terms and, as a result, are often exaggerated. economist Mike Schussler said that in terms of total private-sector debt to GDP, South Africans are not too highly indebted compared with many countries in the world.

On the other hand, said Schussler, vehicle and unsecured lending have become the first and third highest items (respectively) of credit in rand terms, which makes the nature of the debt more risky than, for instance, mortgages, which are backed by physical property.

The report by credit information company TransUnion said the fall in its index reflects deteriorating household cash flow, as rising living costs and a weak job market take their toll on income security. It shows conclusively that consumer credit health continues to deteriorate, said Roets.

It reported that consumer loan defaults continue to rise and that the number of civil summonses for debt — which is the first legal step in the recovery of debt — rose by 5,6% year on year in July to 78 908.

Roets said total consumer debt now tops R1,44 trillion (according to Statistics South Africa).

“We are seeing a dramatic growth in the number of people seeking protection from their creditors by going under debt review” he said.

There has also been big growth in the number of consumers who have their salaries docked by garnishee orders.

One in every four South Africans is unemployed and the number of borrowers with impaired credit records —  three or more payments in arrears — is nearly 50%, he said.

“The writing is on the wall for many middle-class families who only recently escaped from poverty,” he said.

Merina Willemse, economist with Efficient Group, said it is imperative that consumers try to reduce their debt.

“Sooner or later, the prime interest rate is going to rise. We estimate it could be as early as next year. This means consumers who are now barely able to service their debt will fall into arrears.”

The South African Reserve Bank’s quarterly bulletin said that the amount of debt owed by consumers as part of their income is 75,6%. “This means that if you earn R1 000, R750 of your income is already owed to banks or micro lenders,” Willemse said.

The IMF’s prediction of weaker demand and lower commodity prices would impact on the mining sector with the likelihood of more miners facing retrenchment, Roets said.

“We need a growth rate of about seven percent just to accommodate the new workers who enter the economy after completing school,” he said.

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