Dark clouds gather for middle-class South Africa

 ·11 May 2023

South Africans are increasingly turning to credit to make ends meet each month, says financial services firm DebtBusters.

Benay Sager, the head of the group, said that the company’s latest Q1 2023 Debt Index found that consumers are supplementing their monthly income with unsecured credit and personal loans – using them as a lifeline.

He added that over the first three months of this year, 40% more people are seeking out debt counselling compared to last year. Of those, 96% had a personal loan they were paying off.

Sager said this trend will likely continue for the rest of the year as the full impact of successive interest rate hikes and elevated inflation are still to be felt in the wider economy, lagging behind their implementation.

DebtBusters illustrated the severe strain consumers face by comparing the financials of consumers who applied for debt counselling in the first quarter of 2023 to that of 2016.

The group found that consumers have 38% less purchasing power than seven years ago, as inflation growth has reached 40%.

DebtBusters also found that consumers must spend around 65% of their take-home pay to service their debt.

“Those taking home R20,000 or more per month need to use 70% of their income towards debt repayments.”

StatsSA’s latest quarterly employment survey states that the average salary in South Africa is R26,032 a month. According to the University of Cape Town’s Liberty Institute of Strategic Marketing – earning roughly R22,000 makes a household middle class.

DebtBusters raised concern over the high levels of unsecured debt, with the average increasing by 30% since 2016; however, for people taking home more than R20,000, it was 67%.

“Although the volume of unsecured loans had declined by 13% since 2016, the average loan size had grown by 34%. This indicates that although the lending-risk appetite is not back to pre-pandemic levels, larger loans were being granted to the same number of consumers,” said the group.

The graph below illustrates the debt-to-net income ratio for different earning brackets:

The main sources of debt for consumers continue to be large assets, including bond repayments and vehicle asset financing.

DebtBusters said that starting from Q2 2020, average interest rates for bonds and vehicle finance started to decrease, thanks to multiple interest rate reductions by the South African Reserve Bank (SARB).

This ushered many consumers to purchase vehicles and homes at attractive interest rates, DebtBusters said.

“As interest rates started to increase in late 2021, these consumers have started to feel the increasing burden of servicing asset-linked debt: average interest rate for a bond went from 8.3% in Q4 2020 to 11.4% in Q1 2023, and more asset debt has been restructured as part of debt counselling during this period,” noted the group.

The pain is not over yet for middle-class South Africans, with the South African Reserve Bank expected by analysts and economics to hike interest rates again this month to try and cool stubbornly high inflation.

The most recent decision from SARB’s Monetary Policy Committee (MPC), in late March, saw a surprising move to hike interest rates by 50 basis points. This hike took the repo rate to 7.75% and the prime lending rate to 11.25% – a 14-year high.

Read: Rand drops to 3-year low

Show comments
Subscribe to our daily newsletter