South African households in dire straits

South African households continue to feel the pressure of the country’s high cost of living despite the formation of a new government and lower interest rates.

This was revealed in the latest Altron FinTech Household Resilience Index (AFHRI), which was released today.

This index confirmed the continued financial pressure on South African households, mainly due to the high interest rates over the past two years, which have raised the average debt cost burden to its highest level in 15 years.

Economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech, said the Monetary Policy Committee’s (MPC) restrictive monetary policy stance has come at a huge cost to the economy. 

“One of the most worrying trends in the latest AFHRI is the year-on-year decline of 3.3% in the ratio of household income to debt costs,” Botha said. 

“Merely two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs.” 

“This ratio has since increased by 36%, with households now having to spend 9.1% of their disposable incomes on servicing debt.”

Botha said the decision MPC’s decision to follow a restrictive monetary policy stance at the end of 2021 has resulted in a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks. 

He explained that South Africa’s prime rate was 7% at the end of 2021 but jumped to 11.75% in May 2023, where it stayed for 16 consecutive months. This represents an unheard-of increase in the cost of credit of 68% – based on the real prime overdraft rate. 

“The unwarranted increases in lending rates have a stifling effect on demand in the economy, especially household consumption expenditure and new investment in productive capacity by the private sector,” he said.

Below is the AFHRI for the second quarter of 2024.

Botha assessed the latest trends emanating from the constituent indicators of the AFHRI and identified the problem areas for indicators that possess a relatively large weighting:

• Salaries in the public sector
• Employment in the public sector
• Household disposable incomes
• The ratio of household income to debt costs. 

He said these indicators are not expected to increase in meaningful terms until such time as interest rates have declined to at most the same level as before the Covid pandemic, i.e. a prime rate of 10% or lower.

However, Botha said that, despite the mediocre improvement of the AFHRI in the second quarter, some positive trends exist amongst key constituent indicators, including the following:

• Private sector employment has risen by 459,000 since the second quarter of 2023. With interest rates bound to be lowered further in November and early in 2025 and the Government of National Unity (GNU) now engaged in a closer relationship with business leaders in the private sector, the prospects for further employment gains have improved.
• Following a lengthy period of decline, real labour remuneration in the private sector has increased, both quarter-on-quarter and year-on-year.
• The rise in the value of unit trust assets, which serves as a proxy for potential investment income for many households, is bound to increase further in the second half of the year, mainly as a result of the recent new record for the JSE All Share index.

Altron FinTech MD Johan Gellatly said the latest AFHRI report is deeply concerning. 

“Although the GNU has created expectations for growth amongst international and local investors, the persistent issue of unemployment is unacceptable,” he said.

“We urgently need to capitalise on our growth mindset and support every sustainable initiative that attempts to create jobs. 

“There is no quick fix. The indicators are clear: we require all hands on deck to actively reduce unemployment.”

He said South Africans have proved themselves to be remarkably resilient. They have managed to make ends meet, even when their disposable incomes are under dire pressure due to sustained periods of extremely high interest rates.

“All indicators, including the AFRHI, point to the need to lower interest rates in order to start assisting consumers,” he said. 

“This is equally important in terms of growing the economy, attracting investment and reducing unemployment.”