South African households in deep trouble

South African households are spending an increasing share of their disposable income on paying back existing debt, with debt-servicing costs rising towards 10% of income. 

This is only set to get worse as credit card growth remains strong as consumers turn to debt to maintain their lifestyles amid rising prices. 

Nedbank, in its interim results presentation, revealed just how much pressure the South African consumer is under, with increased financial strain on households beginning to impact their bottom line. 

The bank said real incomes continued to decline in South Africa, and employment prospects remained muted in the first half of the year. 

Corporate activity was also poor due to the uncertain political and economic environment, with signs of a slight pickup towards the end of the period. 

“The financial implications of these difficult macroeconomic outcomes were evident in continued elevated levels of consumer strain and slow lending and transactional revenue growth across both wholesale and retail clients,” said CEO Jason Quinn.

South African households have come under increasing pressure as the Reserve Bank has kept interest rates at 15-year highs for over twelve consecutive months. 

The bank hiked rates by 475 basis points since November 2021 in response to rising inflation in South Africa. 

As inflation moderated, there were hopes that rate cuts would swiftly follow. However, as Nedbank flagged, inflation remains sticky in South Africa. 

There is a significant delay between interest rates being hiked and the impact felt by households, with the lag period typically around six months. 

Thus, debt-servicing costs for products such as home and car loans remained low throughout 2021 and the beginning of 2022. 

Since then, these costs have skyrocketed, eating up an ever-larger chunk of household disposable income. For example, the monthly repayments on a R1.5 million home loan have risen by R4,600 in two years. 

Nedbank’s data showed that debt-servicing costs have soared above 9% of total income, with no sign of slowing down as interest rates remain elevated. 

This trend is set to only accelerate towards the end of 2024 as South Africans increasingly turn to debt to fund their lifestyles and, in some cases, to buy basic goods. 

In its latest Quarterly Bulletin, the Reserve Bank revealed that household debt as a share of income continues to rise in South Africa. 

The bank said high interest rates, weak consumer demand and lower disposable income dominate the current economic environment. 

This has been compounded by declining business confidence, which has resulted in companies spending less, limiting wage increases, and cutting back on hiring. 

However, there are signs this is beginning to shift, with confidence in the economy rising to a two-year high due to greater certainty about forming a new government. 

This shift will not save consumers, with businesses predicting an uptick in economic prospects in only six months. 

In the meantime, consumers have had to increasingly rely on debt to maintain their lifestyles. 

Household debt as a share of nominal disposable income increased to 63.3% in the first quarter of 2024 from 62.2% as the increase in household debt exceeded that in nominal disposable income. 

In absolute terms, South Africans have over R2.35 trillion in debt, and a third of all credit-active consumers have missed more than three monthly repayments. 

This indicates that consumers are taking more debt than they can pay off and are increasingly relying on credit to purchase basic necessities. 

Debt repayments have begun to crowd out spending on goods and services, which will translate into poor economic growth as a significant portion of South Africa’s GDP comes from household consumption. 

The Reserve Bank’s data showed that this is already happening. Spending on personal transport equipment declined, while expenditure on computers, entertainment, and other durable goods has slowed so far this year. 

Vehicle sales have also taken a significant hit from interest rates remaining at 15-year highs for over a year, the bank said.