South African consumers confronted the coronavirus pandemic not earning enough and relying mostly on debt to bridge the shortfall between their living expenses and their income, the latest DebtBusters' data shows.
The credit bureau published the first quarter "Debtometer" for 2020, a report that gauges the state of indebtedness for consumers who approached it for debt counselling and debt management. DebtBusters’ chief operating officer, Benay Sager, said even before the lockdown, South Africans consumers were taking on more debt to supplement incomes. This phenomenon is likely to spiral out of control as some households have seen some breadwinners lose a portion of their income or lost it in its entirety.
Debt counselling enquiries increase
"We'll be looking at April-May data pretty soon. But what we have seen is that a lot of consumers have taken advantage of the payment holidays granted by banks. But when those come to an end in June, we are expecting a lot more people to be in worse off situation than they were before," said Sager.
The SA Reserve Bank has cut interest rates by 275 basis points so far in 2020 to try and help households manage their debt repayment burden. Credit bureau companies are yet to release data on how many consumers moved to the red in the first five months of 2020 to gauge the impact of this intervention in April and May.
However, Sager said DebtBusters which had already received 50% more debt counselling enquiries in the first three months to March saw these shoot up 80% in April and May, compared to the same months last year. However, not all people who make debt counselling enquiries sign up for it. Debt counselling requires individuals to still have consistent income to sign up, even if it is reduced.
Debt servicing costs were already unsustainable
The problem is that before some households' incomes got reduced by the lockdown, they were spending 64% of their take-home pay on average to repay all their monthly debt instalments. Low-income-earners taking home less than R5 000 a month coughed out 71% on average.
"The average salary in South Africa is R3 500 and so many people have to get by on that. You are left basically with about R1 000 a month to pay for food, pay for your transport, pay for your kids' needs," said Sager.
Credit bureau, TransUnion expects to release its Q1 2020 Industry Insights Report in mid-June. But prior to Covid-19, the bureau's data showed that serious delinquency levels – accounts that are three or more months in areas – were rising significantly, even for secured motor and home loan portfolios. The last three months of 2019 represented the eighth consecutive quarter in which more consumers' home loans moved deeper into arrears.
TransUnion South Africa has put together different scenarios on how Covid-19 could change this. Even without Covid-19, delinquencies were expected to continue with their previous pace. The worst scenario, in which the country takes one year to recover, TransUnion South Africa director of research and consulting, Carmen Williams said delinquency was expected to "deteriorate significantly".
Stagnant salary increases to blame
While the spotlight now is in the impact of Covid-19, DebtBusters say this household debt crisis stems from the fact that nominal salaries and wages in SA increased by just 1% between 2016 and quarter one of 2020 while inflation shot up 19% over the same period. This means, in real terms, the income South African's earned in the first quarter of 2018 couldn't buy them 18% of the things it used to in 2016.
"If you are a private sector employed person, the likelihood is that you didn't get any meaningful pay increases over the last several years. That's what makes it bad," said Sager.