The latest Altron FinTech Household Resilience Index (AFHRI) highlights the continued financial pressure on South African households, mainly the result of the ongoing restrictive monetary policy stance by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB).
According to economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech, arguably the most worrying trend in the latest AFHRI is the year-on-year decline of 8.7% in the ratio of household income to debt costs.
“Merely two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs”, noted Botha.
“This ratio has since increased by 37%, with households now having to spend 9.2% of their disposable incomes on servicing debt”.
“It is no surprise that this dramatic increase in the debt servicing costs of households coincided with the decision by the Monetary Policy Committee (MPC) of the Reserve Bank at the end of 2021 to follow a restrictive monetary policy stance," said Botha.
“This has resulted in a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks.
Botha pointed out that South Africa’s prime rate was 7% at the end of 2021, but has now jumped to 11.75%, representing an unheard-of increase in the cost of credit (and capital) of 68%.
He noted that unwarranted increases in lending rates have a stifling effect on demand in the economy, especially household consumption expenditure and new investment in productive capacity by the private sector.
The AFHRI has an inverse relationship with domestic lending rates – the higher the SARB’s repo rate (and the linked prime overdraft rate) – the higher the cost of credit and working capital, which negatively impacts the financial disposition of households.
The graph illustrates the AFHRI trend based on a four-quarter average, which eliminates seasonal variances. A pronounced recovery and new growth impetus occurred shortly after the worst of the COVID-19 period, but this was clearly halted in its tracks and then reversed by the restrictive monetary policy of the MPC.
Over the last year, credit impairments by banks have increased by 10% to a level of R198 billion.
Household consumption expenditure, which is the dominant demand factor in the generation of GDP, decreased by 8.5% on a quarter-on-quarter basis, and by 0.4% year-on-year. These declines equate to even larger negative per capita declines in the financial resilience of households.
House prices continue to decline in real terms, a trend that is associated with the decline of 36% in the number of new home loan applications administered by BetterBond since the start of the rising interest rate cycle towards the end of 2021.
Despite the first quarter decline in the AFHRI, some positive trends exist amongst key constituent indicators, including the following:
Since the third quarter of 2021, private sector employment has risen by more than 1.8 million.
Once the National Logistics Crisis Committee succeeds to improve the efficiency and the capacity of the country’s logistics infrastructure, substantial new jobs are likely to be created in various sectors of the economy, especially in construction, which is highly labour-intensive.
“The excessively restrictive stance of monetary policy remains a point of huge concern for the millions of indebted households and businesses,” said Botha.
“Despite inflation having moved to a comfortable level of close to the mid-point of the Reserve Bank’s target range of 3% to 6%, the MPC’s dogged insistence to maintain a real prime rate of between 6% and 7% defies logic, as this rate is now 126% higher than the average real prime rate that existed in 2014, just before the retirement of Gill Marcus, the previous Governor of the Reserve Bank."
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