by Piet Coetzer

Economy and personal finance

Is consumer debt heading for a bubble?

The SA Economy and consumer debt
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Minister of Finance, Pravin Gordhan’s budget policy statement at the end of last month was widely welcomed. Particularly welcome was the minister’s commitment to crack the whip on soaring state spending. But the picture of the country’s consumers does not look rosy at all and a bubble in consumer debt seems to building. 

It recently transpired, from the Reserve Bank’s latest six-monthly review, that unsecured loans in South Africa surged by 21% to R381 billion as of June 2012. It also constitutes the largest slice of consumer debt after mortgages on residential property.

As corporate lending has slowed down on the back of a weak global economy, South African banks have increasingly expanded activity into the profitable but potentially risky market of unsecured loans. This market, for a large part, consists of high-interest loans including credit cards and overdrafts that are not backed by collateral.

According to a recent Reuters report, some analysts have warned that there may be a bubble forming in this market.

As a further sign that a structural problem is developing on this front in the South African economy, foreign direct investment (FDI) flows to the country shrank by 43.6% in the first half of 2012 compared to the same period last year, according to the United Nations Global Investment Trends Monitor.

South Africa is not alone in this trend of plummeting FDI. There has been an 8% drop in global FDI inflows due to heightened economic uncertainty, according to the UN report.

However, because of the country’s historically close links to the economies of the developed world, it seems to be bugging the trend for Africa and other parts of the developing world. FDI for the African continent as a whole, for instance, rose by 5%.

What is happening to South Africa on this front is a reflection of sluggish domestic economic growth as well as a slowdown in developed economies. "It reflects the situation in the main investors in South Africa (which) are the developed countries," said Astrit Sulstarova, an economist, at the UN Conference on Trade and Development  at the time of the report’s release.

Consumer’s plight

In the mean time, an index tracking the financial health of South African consumers indicated that consumers' financial vulnerability remains high. In the second quarter of 2012 overall consumer exposure rose from mild in the previous quarter to very exposed.

There is also a rising trend of informal borrowing to fund daily necessities.

Last month the debt counselling agency Credit Matters’ Consumer Debt Report, revealed that more than 8.9 million South Africans are trapped in debt. Debt counsellors estimated that more than 50% could rid themselves of their financial woes but only in in  20 years time!

Debt counselling agencies are swamped with 276 600 applications for debt reviews, a last-ditch intervention to allow consumers to restructure debt to avoid blacklisting or repossession. The applications have increased from 27 600 in September 2008.

The survey also found that:

·         South Africans pay about 75% of their salaries to service debt;

·         Economists think 400 000 to 500 000 jobs could be lost in what remains of this year;

·         Since last year 5 947 companies and close corporations sought voluntary liquidation;

·         More than 8.9 million people have bad credit records with accounts three or more months in arrears and an average of 174 000 are added to the list each quarter;

·         More than 16.4 million accounts, from electricity to retail store accounts, are impaired and more than 6 million are more than a month or two in arrears; and

·         Household debt, which was R952 billion in 2008, now tops R1.2 trillion. This is money owed to financial institutions for mortgages (more than half the total), overdrafts, leases, instalment sales and credit cards.

"We are in the midst of a debt tsunami. The sirens have sounded, the wave has come and now it's simply sink or swim," Roger Brown, chief executive of Credit Matters said about the report. He added that it has become extremely difficult for many South Africans to get themselves out of debt.

It is a situation that could still pose a major threat to the country’s economy in the near future.

 

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