The results of the most recent Altron FinTech Household Resilience Index (AFHRI) were released today, confirming the continued financial pressure on South African households, mainly the result of the ongoing restrictive monetary policy stance by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB).
According to economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech, arguably the most worrying trend in the latest AFHRI is the year-on-year decline of 8.7% in the ratio of household income to debt costs. “Merely two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs,” notes Botha. “This ratio has since increased by 37%, with households now having to spend 9.2% of their disposable incomes on servicing debt.
“It is no surprise that this dramatic increase in the debt servicing costs of households coincided with the decision by the Monetary Policy Committee (MPC) of the Reserve Bank at the end of 2021 to follow a restrictive monetary policy stance,” says Botha. “This has resulted in a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks.
Botha points out that South Africa’s prime rate was 7% at the end of 2021, but has now jumped to 11.75%, representing an unheard-of increase in the cost of credit (and capital) of 68%. He points out that 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.
The AFHRI has an inverse relationship with domestic lending rates – the higher the SARB’s repo rate (and the linked prime overdraft rate) – the higher the cost of credit and working capital, which negatively impacts the financial disposition of households.
Results of the AFHRI for the first quarter of 2024
The graph illustrates the AFHRI trend based on a four-quarter average, which eliminates seasonal variances. A pronounced recovery and new growth impetus occurred shortly after the worst of the COVID-19 period, but this was clearly halted in its tracks and then reversed by the restrictive monetary policy of the MPC.
The table below summarises the performance of the different indicators comprising the AFHRI over four different periods, ie, since the base period (Q1 2014); since the last comparable quarter before the COVID-19 lockdowns – Q1 2020; quarter-on-quarter; and year-on-year (percentage changes in real terms). The period since the first quarter of 2020 is regarded as relevant to gauge whether the financial resilience of households has fully recovered from the pandemic or not.
The downside
In assessing the latest trends emanating from the constituent indicators of the AFHRI, the following may be regarded as red flags for economic growth prospects:
- After a welcome reversal of a downward trend in the AFHRI that lasted for six successive quarters, the first quarter witnessed a quarter-on-quarter decline in the index value of almost 4%, which also impacted negatively on the four-quarter average index value. The latter provides a smoother trend line for the AFHRI, as it eliminates any seasonal influences inherent in several of the constituent indicators.
- A total of 12 of the 20 constituent indicators of the AFHRI recorded negative year-on-year declines, while 13 recorded quarter-on-quarter declines. This is in sharp contrast to the AFHRI for the previous quarter when only six of the indicators were in negative territory. The overall index managed to only record a marginal year-on-year decline of 0.6%. A point of particular concern is the fact that households are now worse off than they were in the last comparable quarter before the COVID pandemic, with a decline in AFHRI of almost 1% between the first quarters of 2020 and 2024.
- Over the last year, credit impairments by banks have increased by 10% to a level of R198 billion.
- Household consumption expenditure, which is the dominant demand factor in the generation of GDP, decreased by 8.5% on a quarter-on-quarter basis, and by 0.4% year-on-year. These declines equate to even larger negative per capita declines in the financial resilience of households.
- House prices continue to decline in real terms, a trend that is associated with the decline of 36% in the number of new home loan applications administered by BetterBond since the start of the rising interest rate cycle towards the end of 2021.
On a positive note:
Despite the first quarter decline in the AFHRI, some positive trends exist among key constituent indicators, including the following:
- Since the third quarter of 2021, private sector employment has risen by more than 1.8 million. Once the National Logistics Crisis Committee succeeds to improve the efficiency and the capacity of the country’s logistics infrastructure, substantial new jobs are likely to be created in various sectors of the economy, especially in construction, which is highly labour-intensive.
- Following a lengthy period of decline, real levels of labour remuneration in the private sector have stabilised, with marginal year-on-year growth, based on the four-quarter average (which eliminates the seasonal spike related to bonus payments at year-end).
- Sustained employment growth has prevented the overall AFHRI trend from a steeper decline. According to the Quarterly Labour Force Survey by Statistics SA, more than 1.8 million jobs have been created over the past three years.
“The excessively restrictive stance of monetary policy remains a point of huge concern for the millions of indebted households and businesses,” says Botha. “Despite inflation having moved to a comfortable level of close to the mid-point of the Reserve Bank’s target range of 3% to 6%, the MPC’s dogged insistence to maintain a real prime rate of between 6% and 7% defies logic, as this rate is now 126% higher than the average real prime rate that existed in 2014, just before the retirement of Gill Marcus, the previous Governor of the Reserve Bank.
“The standard of living of South African households will not be lifted unless interest rates decline to substantially lower levels – at the very least to the prime rate that existed at the beginning of 2020, namely 10%.
“Fortunately, the future outlook for the AFHRI is quite positive, due mainly to the prospects for even lower inflation,” says Botha. He points out that the largest single component of consumption expenditure on which the calculation of inflation is based, namely food and beverages, has only increased by 4.4% over the past year, while the welcome decline of more than 100 basis points in South Africa’s long-term bond yield also suggests that a meaningful decline in the repo rate is now overdue.
MD of Altron FinTech, Johan Gellatly, says: “The South African consumer remains under financial pressure when the results of the latest AFHRI are interrogated. The most worrying aspect is that the pressure is not abating and something has got to give; lowering interest rates would assist in creating an environment that allows SMEs to grow and that would rapidly alleviate the unemployment challenge.
We are continuously striving to provide cost friendly digital transacting products to assist our customers and their consumers to make ends meet. We have recently launched our credit disbursement, NuCash, product to increase financial inclusion and this will become a primary credit disbursement platform. We have provided our customers with data analysis functionality to increase the quality of the consumers they onboard by incorporating data points other than credit bureau inputs. We are working on several initiatives that are all focused on making it easy for our customers and their consumers to contract with us.”
In recognising the need for data that provides more clarity on the financial disposition of households in general, and their ability to cope with debt in particular, Altron FinTech commissioned economist and economic advisor to the Optimum Investment Group, Dr Roelof Botha, to assist in designing this index. The index comprises 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 calculated every quarter, with the first quarter of 2014 being the base period, equalling an index value of 100. All the indicators are expressed in real terms, ie, after adjustment for inflation.
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