New report shows the good and bad of consumer debt in South Africa

The TransUnion Consumer Credit Index (CCI) climbed again in the first quarter of 2018, implying a notable improvement in consumer credit in the context of a difficult economic environment.

The latest report covers the first quarter of 2018, a period of significant political changes in South Africa after the appointment in February of a new president and new personnel in critical economic and regulatory ministries.

The CCI increased by one point to 56 in Q1 2018. On the zero to 100 scale, an index level of 50 is considered the ‘break-even’ point and scores above 50 reflect improving credit health.

The latest CCI index level shows that households are experiencing improvement in their financial conditions even though they are on average still quite heavily indebted, TransUnion said.

One of the most notable trends in the Q1 report was the ongoing and fairly sharp decline in the proportion of 3-month arrear accounts. According to TransUnion, the number of accounts in early default fell from around 890,000 to 816,000 in the year to March 2018, a drop of 8.3%.

While encouraging, the report did note that distressed borrowing ticked up in Q1 2018. However, despite this movement, distressed borrowing was still relatively benign and below 2015/16 highs, which meant households on average did not face immediate financial or budgetary risks.

“It is proving to be difficult for households to pay down credit card and store card debt, and this could be a sign that while households might be feeling some relief due to the improvement in the CCI, they don’t seem financially strong enough to meaningfully reduce debt loads,” said Stephen de Blanche, regional vice president, financial services for TransUnion Africa. 

Another noteworthy insight from the report was the jump in household cash flow growth. Household cash flow is an indirectly measured index that takes into account household income, liquidity, and non-discretionary inflation, which is inflation in high-necessity goods like basic food, transport, accommodation and schooling.

De Blanche said that softer inflation in Q1, combined with reasonably good employment and wage growth, helped household cash flow improve. But again, there were words of caution.

“Petrol prices have risen sharply in recent months and the trend of rand strength is less certain, making imports potentially more expensive. Household cash flow only turned marginally positive in Q1, so it is still vulnerable to macroeconomic pressures and vigilance should remain the order of the day.”

Despite two 25 basis point Reserve Bank rate cuts over the past year and a mild economic recovery in the past 18 months, residential house prices in South Africa declined in Q1 2018 at the fastest rate since 2009, falling 1.6% between December and March, TransUnion said.

The decline in the average price in Q1 means that house prices are almost flat for the year (+1% y/y in March) and aren’t even keeping up with the softer rate of CPI inflation (+3.8% y/y in March).

“It is worth considering how softer home prices will affect and be affected by consumer credit health. On the one hand, rising consumer credit could support some real estate markets that have been in something of a slump in recent years, but equally, a lack of new mortgage demand can depress prices further, hurting the equity of existing home owners and the collateral value backing bank loans,” the bureau said.

Since the start of 2016, home prices, according to FNB and Stats SA data, have on average declined in CPI-adjusted terms by 7.5%, and by 3% in Q1 2018 alone. “This is a risk factor to keep a close eye on,” TransUnion said.

The CCI measures borrowing and repayment activity across over 20 million individual borrowers and nearly 53 million credit accounts. The index also incorporates key macroeconomic data compiled in partnership with ETM Analytics, a macroeconomic advisory firm.

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