Economic pressures on local households are ever-present.
The latest Altron Fintech Household Resilience Index (AFHRI) results were released today, confirming ongoing financial pressures on South African households, mainly due to the continued tight monetary policy stance of the South African Reserve Bank's (SARB) Monetary Policy Committee (MPC).
According to economist Dr Roelof Botha, who compiles the index on behalf of Altron Fintech, the most worrying trend in the latest AFHRI is the 8.7% year-on-year decline in the ratio of household income to debt costs. “Just two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable income to pay their debt costs,” Dr Botha points out. “This ratio has since increased by 37%, with households now having to spend 9.2% of their disposable income on debt repayments.”
“It is not surprising that this dramatic increase in household debt servicing costs has coincided with the decision of the central bank’s Monetary Policy Committee (MPC) to adopt a tightening monetary policy stance at the end of 2021,” Botha said. “This will lead to an inexorable increase in the official repo rate, which will automatically be reflected in banks’ prime overdraft rates.
Botha points out that South Africa's prime rate has jumped from 7% at the end of 2021 to 11.75% now, creating an unprecedented 68% increase in the cost of credit (and therefore the cost of capital). He points out that unwarranted increases in lending rates have the effect of suppressing demand in the economy, particularly household consumption spending and new investment in productive capacity by the private sector.
The AFHRI is inversely correlated with domestic lending rates, meaning that the higher the SARB repo rate (and the linked prime overdraft rate), the higher the cost of credit and working capital, adversely affecting households' financial position.
AFHRI Results Q1 2024
This chart shows the trend in the AFHRI based on a four-quarter average with seasonality removed. There was a notable recovery and renewed growth momentum immediately following the worst of COVID-19, but this was apparently stalled and then reversed by the MPC's tightening monetary policy.
The table below summarises the performance of the various indicators that make up the AFHRI over four different time periods: the base period (Q1 2014), since the last comparable quarter before the COVID-19 lockdown (Q1 2020), quarter-on-quarter and year-on-year (in real percentage change). The period from Q1 2020 onwards is considered appropriate to determine whether households' financial resilience has fully recovered from the pandemic.
Evaluating the latest trends emerging from the AFHRI's component indicators, the following could be considered warning signs for the economic growth outlook:
The AFHRI had been trending downward for six consecutive quarters, but in the first quarter the index value fell by about 4% quarter-on-quarter, which also had a negative impact on the four-quarter average index value. The four-quarter average index value eliminates the seasonal effects inherent in some of the constituent indicators, resulting in a smoother trendline for the AFHRI. Of the 20 indicators that make up the AFHRI, 12 indicators fell negatively year-on-year and 13 indicators fell quarter-on-quarter. This contrasts with the AFHRI in the previous quarter, where only six indicators were in negative territory. The overall index only fell by 0.6% year-on-year. Of particular concern is the fact that households' situation is worse than in the last comparable quarter before the COVID pandemic, with the AFHRI falling by almost 1% between Q1 2020 and Q1 2024. Over the past year, credit losses by banks increased by 10% to a level of R198 billion. Household consumption expenditure, the primary demand driver that generates GDP, declined 8.5% quarter-on-quarter and 0.4% year-on-year. These declines equate to an even larger negative per capita decline in household economic resilience. Home prices continue to fall in real terms, a trend that is associated with a 36% decline in new mortgage applications managed by BetterBond since the start of the interest rate rising cycle at the end of 2021.
Although the AFHRI declined in the first quarter, several positive trends are evident in its key constituent indicators, including:
Since the third quarter of 2021, private sector employment has increased by more than 1.8 million jobs. If the National Logistics Crisis Committee is successful in improving the efficiency and capacity of the country's logistics infrastructure, significant new jobs could be created across various sectors of the economy, particularly in the highly labour-intensive construction industry. After a long period of decline, real labour compensation levels in the private sector have stabilized and have increased slightly year-on-year based on a four-quarter average (excluding seasonal spikes related to year-end bonus payments). Sustained employment growth has prevented the overall trend in the AFHRI from declining sharply. According to Statistics South Africa's Quarterly Labour Force Survey, more than 1.8 million jobs have been created over the past three years.
“The overly tight stance of monetary policy remains a major concern for millions of indebted households and businesses,” Botha said. “The MPC's stubborn insistence on keeping the real prime rate at 6% to 7% defies logic, even as inflation has risen to a comfortable level close to the midpoint of the central bank's 3% to 6% target range, as this rate is 126% higher than the average real prime rate in 2014, just before the departure of the central bank's previous governor, Gil Marcus.”
“South African households' standards of living are unlikely to improve unless interest rates fall to significantly lower levels, at least to the prime rate at the start of 2020, i.e. 10%.”
“Fortunately, the future outlook for the AFHRI is quite positive, driven mainly by the prospect of further declines in inflation,” Botha says. He points out that food and beverages, the largest component of consumer spending on which inflation is calculated, has grown by just 4.4% over the past year, while the encouraging fact that South African long-term bond yields have fallen by more than 100 basis points suggests that a significant decline in repo rates is overdue.
Johan Gellatly, MD of Altron Fintech, said: “Looking at the latest AFHRI results, South African consumers remain under financial pressure. What is most worrying is that the pressure is not easing and something has to change. Lowering interest rates would create an enabling environment for small businesses to grow and rapidly ease the unemployment problem.”
We continuously strive to provide cost-effective digital transaction products to help our clients and their consumers make ends meet. We recently launched NuCash, a credit payment product to expand financial inclusion, which will be our leading credit payment platform. We are providing our clients with data analytics capabilities to enhance the quality of consumers they onboard by incorporating data points beyond credit bureau inputs. We are working on several initiatives focused on making it easy for our clients and their consumers to engage with us.”
Recognizing the need for data that would provide greater visibility into households' financial situation in general, and their ability to handle debt in particular, Altron FinTech commissioned Dr. Roelof Botha, economist and economic advisor at Optimum Investment Group, to design the index. The index is made up of 20 different indicators, all of which are directly or indirectly related to sources of income or asset values. The AFHRI is weighted according to the demand side of the short-term lending industry and is calculated quarterly. The base period is the first quarter of 2014, with an index value of 100. All indicators are expressed in real terms, i.e. adjusted for inflation.