Over two years of consumer credit health problems, and more to come as the strikes bite
The state of South Africa's consumers has been a point of concern for a long time. When interest rates hit 40-year lows in 2012, and even earlier than that, when rates started falling in 2009, South African consumers responded by bingeing on credit. Consumer indebtedness climbed, as did consumer debt-to-disposable-income ratios, which hit a high of 82.7 in 2008.
Consumers began to take strain, and companies began to fret about what would happen when the interest rate cycle turned and consumers who were relying on debt to live began to struggle. With unemployment remaining essentially flat and incomes growing at a relatively slow pace, consumers began to find their debt obligations onerous, and arrears began to increase. Today, with interest rates rising, unemployment stagnant, and the economy growing slowly, the picture is fairly worrying. In particular, it's unclear what effect over-indebtedness will have on consumer spending, and what will happen to lenders like African Bank as bad debts tick up. – FD
ALEC HOGG: The TransUnion Consumer Credit Index showed that consumer credit health in South Africa deteriorated again in the first quarter of this year, marking it for the ninth straight quarter in deterioration. Joining us for more is Geoff Miller, Chief Executive of TransUnion. I'm sure Geoff, you were watching that clip of Christine's reporting and thinking 'well, there has to be another way' because if you were doing the indexes as you do every three months and continue seeing deterioration, I guess you scratch your heard and think 'how are we going to turn this around'.
GEOFF MILLER: Yes, the base of it all is economic growth and as we've seen, it's anaemic and continues to look anaemic. There's going to have to be some change in terms of employment if the overall economy and consumer credit health is going to change drastically.
ALEC HOGG: Are most of the people you're serving employed by big companies or are they self-employed?
GEOFF MILLER: Ours isn't survey-based: its actual factual data that we're able to cull from our database. We're unable to determine if they're self-employed and/or in the formal job sector, so it's really difficult for us to break it up between the two.
GUGULETHU MFUPHI: This is the ninth consecutive quarter – two years of negativity. How long will the cycle potentially last?
GEOFF MILLER: We don't expect a drastic change in the short to medium term. It's just below 50, 50 meaning its deteriorating. Above 50 means, it's improving. Given the strikes we've seen, given the most likely potential rates hikes/increases – that is probably coming sometime later in the year – and inflation. If you look at the March CIP, it was not good news for the consumer if you're buying food to live on and day-to-day expenses. We expect consumers to remain under stress for a longer period of time.
ALEC HOGG: Just explain that. It's under 50, but it's not as far below 50 as before.
GEOFF MILLER: As it used to be – right. What we've seen is probably the last eight quarters or so, you saw many consumers who were unable to pay their debts. You saw delinquencies rise fairly dramatically. That started to level off now…not really 'levelled off' because the consumer's that much better off, but mainly because banks and financial institutions have been fairly proactive for the last 18 to 24 months, really tightening credit policy, and tightening affordability guidelines. Consumers therefore have a harder time gaining credit and therefore less consumers are falling over.
GUGULETHU MFUPHI: For a bank like ABIL, which relied so strongly on unsecured lending, what does the outlook look like for them?
GEOFF MILLER: I guess they've made some proactive credit policy measures, so I think the consumers they're bringing on seem to be fairly healthy. However, they still have a tremendous amount of debt that they've written over the last 36 months. Those consumers are very much at risk given interest rate increases and what's happening with inflation. Things may have stabilised, but I don't think they're out of the woods yet.
GUGULETHU MFUPHI: The platinum sector strike Alec, is also another key area we've been focusing on as well.
ALEC HOGG: It is. We were talking off-air about that and the eighty thousand people from AMCU who haven't received any wages for…into their 14th week. Would they also come into the debt…?
GEOFF MILLER: Yes, most definitely. Micro lenders were very active in the region and as you say, they haven't been paid in 13 weeks. I was reading over the weekend. On average, these miners support two families and up to eight people on average. They must be under severe strain. We wouldn't necessarily see that data coming through in this version/release of the index, but we would expect to see that impact as we look into the second quarter.
ALEC HOGG: So next quarter the numbers are also going to be bad. You can almost write in ten successive quarters of deterioration. Yes, we would expect it to remain like that. The Rand has come back a little bit, but unemployment remains muted, economic growth remains muted, so while it could marginally improve, I don't see any reason that's pointing to a dramatic improvement.
GUGULETHU MFUPHI: What would it take to improve the situation?
GEOFF MILLER: Wage growth would need to increase. Employment would need to increase. We're probably in a period of stabilisation, so I don't expect things to get much worse, but I don't expect things to get much better. Economies take a while, so I rather expect us to be bouncing along the bottom here for at least another couple of quarters before we see any light.
ALEC HOGG: Getting back to that discussion, which Christine brought there…getting back to the James Caan interview that we have later, something different needs to be looked at. We have a Ministry of Small and Medium Enterprise that mooted to be introduced after the elections, but the best way to earn income is to have your own shop or your own operation, rather than be at the mercy of restructuring or downsizing etcetera, which clearly has been the case for most consumers.
GEOFF MILLER: Absolutely. Our view clearly is the formal job sector or the large companies/large enterprises are not going to be the way to job growth in South Africa. It's going to have to be the SMME's and to be frank; SMME funding is just not there. The banks aren't necessarily willing to take the risk. Government doesn't necessarily have the right programs to stimulate those types of companies opening up.