South Africa’s wealthy and middle class are in trouble

Credit bureau Experian has published new data showing how the pandemic and weaker economy has impacted affluent South Africans.

The group said that while the lockdown impacted poorer South Africans initially, its Consumer Default Index (CDI) shows that wealthier South Africans are no longer immune to financial struggles.

The Experian Consumer Default Index (CDI) is designed to measure the rolling default behaviour of South African consumers with home loans, vehicle loans, personal loans, credit cards and retail loan accounts.

The most affluent consumer group, the ‘Luxury Living’ segment, makes up 2.5% of the South African population yet accounted for 35% of total credit exposure in 2021 Q4, the data shows.

This group deteriorated in CDI terms, with the default rate increasing year-on-year from 2.30 to 2.47, resulting in a 7% deterioration in the CDI.

It contrasts strongly with the relative improvements observed in all five other income groups. People in this category have an average opening home loan balance in excess of R1.2 million (54% owning one home and 25% owning multiple properties) and an average opening vehicle loan balance greater than R450,000.

This group is highly exposed to secured credit and is typically deemed the least risky consumer segment, Experian said.

“The deterioration in this group is concerning. Historically they have been the most stable segment, suggesting they are increasingly feeling the pressure of increased fuel prices and the daily cost of living, not to mention the impact of the recent increase in lending rates,” said Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa.

Broader index shows improvements 

The broader data shows signs of encouragement, as the rate people defaulted on their loans for the first time improved in the fourth quarter of 2021.

People defaulted on their loans at a lower rate than the fourth quarter of the previous year, although the index remained relatively flat compared with Q3 of 2021.

The downward movement of the index was largely due to significant improvements in the Vehicle Loan as well as the Personal and Retail Loan Indices.

The latter two product sets contribute around 17% towards the Composite CDI, while Vehicle Loans carry 23% of the Composite. The improvements seen in these three products’ CDI metric exceeded the deterioration seen in the Home Loans and Credit Card indices on a year-on-year basis.

“With the impact of the Covid-induced economic lockdown now seemingly a thing of the past, South Africa can prepare for increased levels of economic activity by consumers over the next few months,” said van Jaarsveldt.

“However, as travel restrictions are lifted, and entertainment curfews are done away with, people must be responsible and pragmatic – especially if they are inexperienced in the world of credit and seeing interest rates increase for the first time. Lenders will rely on credit information to understand which people are best placed to afford to make loan repayments.”

The CDI remained stable in the fourth quarter of 2021 at 3.45 , improving only marginally from 3.50 when compared with the third quarter. However, the improvement was more significant year on year, moving down 0.57 from 4.02 in 2020 quarter four.

“The latest CDI indicates that the rate of first-time default among South African consumers has continued to improve on a year-on-year basis largely due to three factors. Firstly, credit lenders have, for the most part, shown increased credit risk aversion since the onset of the Covid lockdown regulations, and as such fewer people overall have qualified for credit,” said van Jaarsveldt.

“Secondly, the economic lockdown conditions have resulted in significantly fewer opportunities for consumers to spend a weighty share of their income on travel and entertainment, resulting in due payments on credit commitments being made to a greater extent.”

Lastly, the extended low interest rate environment has supported accelerated debt reduction and made access to new credit more affordable, he said.

Read: Price hike double-blow to hit South Africa

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South Africa’s wealthy and middle class are in trouble