BUSINESS REFLECTION
After the Bell: I owe, I owe, it’s off to the sea of household debt I go
The average debt-active person in SA is paying half their monthly income on servicing their debt.
If you ever want to break into a cold sweat about the state of the SA economy (not that you would necessarily want to do that, but just in case), it’s worth taking a look at the state of debt in this country.
Just one thing at the outset: It’s important to remember the rather obvious fact that one person’s debt is another person’s credit. Debt is not in itself an evil – at best, it’s a utility. Debt can constitute leverage, which is crucial both in business and personal finance.
But, at worst, it’s an indication that you had a lot more fun than you intended. And, more importantly, than the world intended.
Too much debt can, of course, be bad.
As Charles Dickens pointed out in David Copperfield, “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
But what is too much debt? I would argue that South Africans have too much debt – way, way, way too much.
Perhaps you disagree. After all, didn’t I just point out that one person’s debt was another person’s credit? True, but every quarter, analytics company Eighty20 brings out a report on debt in SA and I would like to ask: If you were to guess, what proportion of total monthly income are debt-active South Africans paying to service their debt?
The answer is that the average debt-active person in SA is paying half their monthly income on servicing their debt. Half. Does that not make the hair slightly stand up on the back of your neck?
That means the average debt-active person in SA is one paycheck away from default. Of course, they could have savings to fall back on, but if that were the case, wouldn’t they rather use that to reduce their debt repayments and avoid the steep finance charges?
This average figure doesn’t even fully illustrate the area of biggest concern.
Eighty20 divides the market into four segments: mass market; middle-class workers; heavy-hitters; and comfortable retirees. In total, there are about 20 million debt-active people in SA – around half the working-age population. But the scary bit is that the middle-class workers group is now paying around 80% of their net take-home pay on servicing debt.
As it happens, the overall news here is not bad; to the contrary, it’s generally good in the sense that overall consumer debt is coming down – marginally.
The overdue balance on all loans decreased in the quarter (this is the last quarter of last year compared to the previous quarter) by 0.5%. It is, however, an indication of the quantum of loans out there that this tiny decrease amounts to R1-billion nominally.
Not only did the overdue balance on loans decrease but the number of loans in arrears is also down, though there remain 18.6 million of these overdue loans. The total outstanding debt balance remained flat at about R2.43-trillion.
So, where is the good news? Well, the report says the continued downward trend in loans in arrears means that the proportion of such loans has almost returned to the lowest recorded percentage since Eighty20 started putting out the report in 2018.
I wonder about that, though. I think the fact is that SA’s currently high interest rates mean that the overall appetite for debt has slightly decreased.
More loans are coming onto the books overall, which you would expect with a rising population, but it seems possible that people are being a little more hesitant to take on loans they might struggle to pay back.
Perhaps that’s just wishful thinking, but high interest rates would tend to decrease debt appetite.
Neville Berkowitz, a long-time property economist, makes the point in his newsletter that if you were hoping an interest rate cut would solve this situation, you haven’t done the maths.
The average indebtedness of middle-class South Africans is R152,715. So, a monthly drop in interest rates of 1.25% will save this group around R160 per month. That’s only a few beers.
That doesn’t mean an interest rate cut later this week (very unlikely anyway) wouldn’t be welcome; it just doesn’t solve the longer-term problem.
It’s worth noting, too, that household debt as a proportion of GDP is a variable number around the world.
In the US, it currently stands at 64%, almost the same as it is in China. That puts SA, at about 40%, more or less in the safe zone. But you might want to consider that household debt is about 10% of Indonesia’s GDP and 16% in Mexico.
Some countries just … how does one put this … have more fun than they should. And we are one. DM
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It is remarkable that there are educated(?) opinionistas that still believe that personal “economic” problems can be solved by the government fiddling with interest rates. Let the invisible hand do its good work and sever the grasping claw of centrist, all powerful bureaucrats.
The same invisible hand that gave us the Great Financial Crisis, MBD1, Steinhoff, Tongaat, Evergrande. The invisible hand seems to be not only greedy but willing to break the rules if the punishment doesn’t hurt profits too much.
Don’t forget that the free hand requires not only information symmetry (do you know as much as the CEO of a hedge fund or a central banker?); but more importantly that all economic actors are RATIONAL and will engage with the market accordingly.
I’m all for open and efficient markets but without some regulation you just get many people getting screwed. And on your point of “personal” economic issues: unless you’re in the top 0.1% of individuals interest rates aren’t really applicable to you. The rates are important for big corporates, inter-bank lending and inter-government lending.
Sooo, just checking the math: if the average debt is R150k, and a change in interest rate would only change R160 per month, the average consumer must only be paying R1,400 in interest per month. Which means they are earning R2,800 (50%?)…or, they are repaying a huge amount of principal each month. My point being, I owe a lot more, because I’m paying off a car and a house, both of which I kinda need. I suspect a lower interest rate would make a much bigger difference to most people than R160.
Maybe if the banks weren’t charging penurious interest rates the average South African may be able to recover somewhat. 12% over prime is simply immoral. But then I guess those imported smoked salmon nibbles on the horse estate at Kyalami don’t come cheap. You want to save the average man in the street from disaster? Legislate that the maximum rate any financial institution can charge is prime plus 2%