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Debt fills in 33% shrinkage in real incomes

• DebtBusters survey finds consumers who take home more than R20,000 a month use 68% of their income towards debt repayment

Thuletho Zwane Economic Correspondent zwanet@businesslive.co.za

Take-home pay has remained flat in the past six years and, compounded with elevated inflation and increasing borrowing costs, consumers are forced to supplement their salaries with unsecured borrowing, a survey has shown. According to DebtBusters, South Africans can buy 33% less with the money in their wallets than six years ago once inflation is factored in.

Take-home pay has remained flat in the past six years. With elevated inflation and increasing borrowing costs, consumers are forced to supplement their pay with unsecured borrowing, a survey has shown.

Salaries still remain the largest proportion of income for households across the board, followed typically by social grants, and then other sources that can include borrowings.

The fourth-quarter 2022 debt index survey of DebtBusters, a company that helps consumers manage debt, found that while 2022 nominal incomes were on par with 2016, when the company started analysing the data, South Africans could buy 33% less with the money in their wallets than six years ago when cumulative inflation was factored in.

The data in the survey report, which was released on Thursday, also showed consumers faced a higher debt-service burden and had unsustainably high levels of unsecured debt.

Consumers who take home more than R20,000 a month used 68% of their income towards debt repayment. This debt-income ratio was higher in the fourth quarter compared with the corresponding periods over the past six years.

The level of unsecured debt was also unsustainably high, recording 21% more than that of 2016 levels.

This was worse for consumers who took home more than R20,000 a month, for whom unsecured debt levels were 50% higher. “This is a direct result of erosion of takehome pay,” said DebtBusters head Benay Sager.

Consumers needed to supplement this erosion with unsecured credit, he said..

Sager said that though it seems counterintuitive to say that lending activity has increased as interest rates have risen, this is happening because “consumers supplement their income with credit and use unsecured loans as a lifeline”.

Interest rates, which are now 3.50% higher than in 2021, and have doubled since 2020, significantly affect the indebted.

The front-loading of interest rates by 375 basis points by the Reserve Bank has not put a dent in household credit demand even as borrowing costs, now at 7.25%, stand at levels last seen in 2009.

This can be seen in data released by the Bank this week, which showed that privatesector credit demand rose for the 18th month running in December.

Data showed appetite for household credit accelerated to 7.7% in December from steady growth of 7.4% in November, still marginally beating headline inflation, which stood at 7.2% year on year in December.

The lift came from general and other loans and advances, which rose to 9.4% and 9.2% on an annual basis, respectively. Both figures were the highest since March 2020. Growth in mortgages was steady at 7.1%, while instalment sales and leasing finance, mainly car sales, increased to 8% from 7.9% in the previous month. Sager said it was “ironic” that lending activity rose while interest rate rose. This means South Africans borrow money to get them to the end of the month.

The Ombudsman for Banking Services, Reana Steyn, said all of these increases negated the financial relief initially offered by the rate reductions of 2020.

“Our concern is that South Africans are now feeling the brunt of these increases, with rising living costs eventually influencing the number of consumers forced to default on their debt payments,” Steyn said. “Increasing numbers of defaulters may in turn increase the number of creditors instituting legal action for the foreclosure or repossession of financed goods.”

Investec chief economist Annabel Bishop said they expect overall consumer finances to remain vulnerable especially given slowing economic growth prospects in 2023 and interest rate hikes not yet at an end.

She said consumer inflation is still relatively high, and the latest retail inflation rate of 6.9% in November is the highest since 2009. These indicate further financial strain for households.

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2023-02-03T08:00:00.0000000Z

2023-02-03T08:00:00.0000000Z

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