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Consumer debt is growing at an alarming pace in South Africa, driving inflation upwards.
Attempts by the South African Reserve Bank to bring consumer debt under control will dampen consumer spending, but are necessary to keep economic stability.
Consumer debt has been rising fast in South Africa, causing alarm to the South African Reserve Bank (SARB):
Household debt reached record high levels of 76.0% of disposable income in the first quarter of 2007, up from 47.6% in 2003;
Credit claims on the domestic private sector grew by 24.9% between June 2006 and June 2007;
Consumer debt is seen as the force driving the rapid rise of inflation, reaching 6.4% in June 2007, up from an annual average of 4.6% in 2006. The SARB has reacted by raising the basic interest rate by two and a half percentage points in one year, from 7.0% in June 2006 to 9.5% in June 2007;
Another measure designed to make borrowing more difficult was the June 2007 introduction of regulations requiring credit providers to assess applicants’ income, monthly financial commitments and prospects.
As borrowing money is becoming more difficult and expensive, consumer spending will be more constrained. These measures are necessary to keep inflation in check, but in the short term economic growth may slow, and consumer goods companies will see sales slowing down.
Credit extended to the private sector by type: 2002 – 2006
Source: National statistics.
The expansion of household debt has enabled consumer expenditure to rise dramatically since 2003, and has been one of the drivers of economic growth:
Real GDP growth averaged 4.5% annually between 2003 and 2006;
Private final consumption expenditure rose in real terms by 33.2% between 2001 and 2006;
Total retail sales value (excluding sales tax) rose in real terms by 8.0% in 2004, 10.8% in 2005 and 10.4% in 2006.
The growth of private consumption reflects the emergence of a black urban middle class:
Government policies for black economic empowerment were intended to correct the legacy of Apartheid and spread the fruits of growth among the black majority;
Blacks in the middle and upper-income range accounted in 2006 for at least 12.0% of the employed workforce, up from 2.0% in 2001.
The bulk of household borrowing was in the shape of mortgage advances. Attempts to bring consumer debt down could have a cooling effect on the housing market:
In 2006, mortgage advances accounted for R403 billion or 59.0% of total household debt. Higher interest rates will deter home buyers and make it more difficult to repay loans;
House price inflation has not been affected yet by the interest rate rise, with prices rising by 10.4% year-on-year in July 2007, according to a national bank. But analysts are concerned that a crisis similar to the one unfolding in the USA in the sub-prime mortgage market could happen in South Africa.
As borrowing becomes more expensive, consumer spending will slow down and demand for durable goods will weaken:
According to the National Association of Automobile Manufacturers of South Africa, sales of new passenger cars fell in the second quarter of 2007 by 15.1% compared with the corresponding quarter in 2006.
Private final consumption expenditure and retail sales value in constant 2006 prices: 2001-2006
Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics/National statistics/Trade sources.
By targeting consumer debt, the SARB is hoping to reign in inflation:
The consumer price index in June 2007 was 6.4% higher than in the corresponding period in 2006, above the upper limit of the Bank’s inflation target band of 3.0%-6.0%;
When credit is easy to obtain, households have more access to money. As a result, demand for consumer goods is growing, which leads to inflation in prices;
Inflation creates economic uncertainty, detracts investors and leads to labour unrest, as workers demand their wages to increase in pace with inflation.
The SARB measures are necessary to prevent a dangerous inflationary spiral. In the short term, they will dampen the growth of private consumption expenditure, which has driven economic growth and made the South African consumer market attractive for consumer goods exporters and retailers.
Real GDP growth is projected to remain positive at 4.7% in 2007. Inflation is forecast to remain slightly above 6.0% in 2007 but to fall back to 5.3% in 2008. The government is focusing on economic growth but is aiming to spread its benefits more widely:
Rural communities, making 44.8% of the population in 2006, have not benefited from the urban spending boom, and continue to suffer from severe unemployment and poverty.
The SARB is expected to increase interest rates again in August 2007. The rise in retail sales and consumer expenditure is expected to slow in the second half of 2007 and in 2008.