Trouble for middle class South Africans

 ·7 Mar 2023

South Africa’s middle class is spending money they do not have, turning to credit to fund their lifestyles while increasingly defaulting on their loans.

This tells a very different story of consumer financial health than what retail sales figures are signalling.

Recent data from Eighty20’s Credit Stress Report for Q4 2022 showed that while retail figures indicate that the storm may have lifted for some consumers, there is a growing appetite among consumers for credit. This is despite continued high inflation and rising interest rates.

This may indicate that South Africans are turning to retail therapy while already being financially stressed, the group said.

Eighty20 reported that in the final quarter of 2022, there were over 800,000 new entrants into the credit market, the highest since the pandemic.

Despite this, retail sale activity showed surprising resilience in the fourth quarter. The largest contribution towards this increase came from retailers in textiles, clothing, footwear and leather goods.

Eighty20, a data analytics firm, combines credit bureau data with external data sets to provide a thorough overview of the financial status of South African adults.

Using statistical methods, the company segments consumers based on income and assets, creating four categories: middle-class workers, the mass credit market, “heavy hitters,” and comfortable retirees.

The data shows that middle-class workers appear to be turning to credit card debt to help them fund their lifestyles.

Another major headache for the category of consumers is that they are struggling to meet growing instalments on big loans such as vehicle asset financing and home loans – as a direct result of rising interest rates.

Middle class refers to those with an average monthly income of roughly R15,000.

Eighty20 noted that the middle class is still not as reliant on credit as the mass market group, which earns between R3,000 and R8,000 a month.

For middle-class South Africans, total credit card debt is up 10% over the year, with average credit card loan balances up 12% to R31,000.

Although the proportion of credit card loan value newly in default has increased by nearly 17%, the real concern is how this segment is starting to struggle to meet the growing instalments on VAF and home loans due to interest rate hikes.

Despite almost no growth in Vehicle and Asset Finance (VAF) and home loan balances, the fourth quarter saw high year-on-year increases in the rates of new defaults (RND) for these loan types – 30% and 18%, respectively, the group said.

“The change in RND is the percentage change in the current quarter’s RND relative to the RND in the same quarter the previous year,” said Eighty20.

“The total average instalment-to-income ratio for the middle class has increased by 7.4% over the last year and is now sitting at 69.4% – meaning more than two-thirds of the average middle-class salary goes to servicing debt,” said Eighty20.

Andrew Fulton, the director of Eighty20, said the credit increase came with a surging number of loans, notably credit care, VAF and home plans in default.

“These new entrants took out R9.3 billion in new loan value, the highest in over two years, and up nearly 10% on last year. There has also been a significant surge in credit card balances, with total loan balances up R25 billion (12%) year-on-year.”

“This brings the total credit active population to 18.7 million with total loan balances of R2.3 trillion,” said Eighty20.

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