Hilary Joffe
18 November 2008
column
Johannesburg — ARE SA's consumers caught in the "debt nightmare" of the more alarmist headlines? The answer is probably not. But that doesn't mean we don't have a household debt problem that needs careful handling if nightmares are to be avoided.
The rest of the world may be distraught about debt levels but, in SA, we'd started worrying about it long before the subprime crisis began, because of the speed at which household borrowings were racing up . Given that, the latest figures look better than one might have expected. First, the ratio of household debt to disposable income has finally begun to come down, from its record high of 78,2% in the first quarter to 76,7% in the second. And though the latest Financial Stability Review notes this is way higher than the 60,5% it reached ahead of the 1998 consumer debt crisis, strong growth in incomes and household wealth have supported the growth in borrowing of recent years -- and the cost of servicing the debt is still a lot lower than it was in 1998 because interest rates are so much lower.
But bad-debt ratios have risen and, as the headlines remind us, more than 6-million consumers now have "impaired" credit records. Look carefully, though, and the picture is not that bad, with at least some consumers cleaning up their own balance sheets in response to the interest rate hikes of the past two years. So, for example, the number of new applications for credit in the June quarter was lower than it was six months before. And though the proportion of consumers in good standing has declined over the year to June , this mainly seems to be a case of consumers falling behind on some, not all, of their accounts, so that nearly 78% of accounts are still in good standing.
THE trouble is that the macro figures tell only part of the story. At 76%, SA's household debt ratio is quite modest compared with that of the UK or the US. But ours is a highly unequal society, in which many have only limited access to formal sector credit - it's estimated, for example, that no more than 17% of the population could now afford a conventional mortgage. So it's a case of some households with very high levels of borrowing and others with none. The higher the income, generally, the better the access to credit. Bank figures show households earning more than R7000 a month have debt-to-disposable income ratios that are much higher than the average. And it's these households where debt levels were growing fastest last year, raising all sorts of panic about "black diamonds" and their overindebtedness.
But these are not the households necessarily in the most trouble. The National Credit Regulator's figures show it's among consumers earning R3500-R7500 a month that impairments are highest. These are the people who count as "middle income" in SA , and only 55% of them are in good standing. By contrast, 68% of those earning more than R7500 are in good standing.
That middle, which includes many formal sector blue-collar workers as well as clerks, police and the like, has been boosted by job creation and real wage growth in recent years. But their ability to pay their debts depends on whether they can hold on to their jobs as the economy turns down. Employment risk, in other words, looms larger than interest-rate risk for these consumers, many of whom are using credit from retailers and microlenders rather than accessing bank mortgages. But mortgages are still the largest chunk of the R1,1-trillion in consumer credit, so for the stability of the system overall, the fortunes of those households who hold them (which are also the households who account for the bulk of consumer spending in the economy) are crucial.
The ratios may not look too bad for now. But if the economy gets much worse, they could deteriorate quite rapidly. Households, and their bankers, are very vulnerable.
Joffe is senior associate editor.
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