6 May 2008
editorial
Johannesburg — SPECULATION is rife that strong growth in private sector credit demand is fuelled in part by "distress borrowing" - a term which means consumers are using credit cards and bank overdrafts to finance existing debt, or consumption of essential goods.
But so far, there is only anecdotal evidence to back the theory. Economists have been puzzling over why borrowing by households and companies has stayed robust in the face of rising interest rates and tougher credit rules. Official data shows that private sector credit extension (PSCE) has grown at an annual pace of more than 20% since the start of 2006 -- the year interest rates started to climb. It has slowed from a peak of 27,5% late in 2006, but the trend has been fitful, with last week's data quashing forecasts for a moderation -- PSCE rose by an annual rate of 22,6% in March from 20,79% in February.
There are different ways of breaking down the data and technical changes have led to sharper annual increases in the household component of credit demand since they were introduced in January. What happened was that personal trusts -- previously lumped with corporate trusts -- were split out and added to the household sector. This pushed the year-on-year rise in household credit extension above 24% in January from 19% in December, and has kept it there ever since. But corporate borrowing -- seen as the main driver of credit demand -- also quickened in March, notching up an annual rise of 22,7% versus 18,8% in February.
The answer may lie within the acceleration in the "other loans and advances" category of credit, which leapt by 29,5% in the year to March from 23,9% in February. This volatile component includes overdrafts and credit card borrowing, which could reflect distressed consumer debt. But it also comprises term loans to companies, meaning the increase could reflect finance for capital expansion -- which would be no cause for concern. Either way, given soaring inflation, the data is unlikely to prevent another hike in interest rates at the Reserve Bank's next policy meeting.
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