Middle-class South Africans are in a deep, deep hole

 ·16 Aug 2023

South Africans now find themselves with historic levels of debt thanks to inflation and aggressive interest rate hikes. At the same time, their purchasing power has declined by a significant 38% over the last seven years.

This is according to DebtBusters’ Q2 2023 Debt Index, which found that personal loans have become a lifeline for many more South Africans, and debt-to-income ratios are at all-time highs, especially for top-income earners.

According to the data, in Q2 2023, there was increased demand from South Africans for debt management, with debt counselling inquiries up by 43% and online debt management up by a staggering 99% compared to the same period last year.

“The full impact of successive interest rate increases since November 2021 and elevated levels of inflation is now fully evident in consumer finances,” said DebtBusters’ head, Benay Sager.

“With interest rate increases, lending activity has increased. Average loan size has increased by 78% since 2016, and virtually all consumers (95%) who applied for debt counselling in Q2 2023 had a personal loan – both indicating that consumers continue to supplement their income with unsecured credit, and personal loans have become a lifeline for many,” he added.

The report highlighted that middle-class South Africans and other income brackets suffer from a higher debt service burden, less purchasing power (due to stubbornly high inflation and stagnant wages), and historical levels of unsecured debt.

Debt service burden

The data showed that consumers spend around 66% of their take-home pay to service their debt. This ratio seems to be the highest for the lowest and highest-income earners.

The report noted that those taking home R5,000 or less and those taking home R35,000 or more per month need to use 71% of their income towards debt repayments.

The debt-to-income ratio for the top two income bands is also higher in Q2 2023 compared to the same periods in the past.

The debt-to-income ratio has increased to 150% for those taking home more than R20,000 and 189% for those taking home R35,000 or more per month. These ratios are at all-time high levels.

To put this into perspective, your debt-to-income (DTI) ratio is how much money you earn versus what you spend.

It’s calculated by dividing your monthly debts by your gross monthly income. Generally, experts recommend that it’s a good idea to keep your DTI ratio below 43%, though 35% or less is considered “good.”

“Overall debt levels have remained high, where the total debt to annual net income ratio is now 121% on average,” noted the report.

Purchasing power

Nominal incomes in 2023 were 1% higher than 2016 levels; however, when cumulative inflation growth of 39% is factored in for the same seven-year period, consumers’ purchasing power diminished by 38% over this period.

This means consumers feel like they are taking home 38% less today in real terms than in 2016. When one considers petrol prices almost doubled and electricity has increased by ~90% over the same period, consumers feel like they are taking home far less than they did previously, the report said.

Unsecured debt

The report showed that most consumers who applied for debt counselling in Q2 2023 face unsustainably high levels of unsecured debt.

Unsecured debt levels were, on average, 26% higher than that in 2016 levels. While this ratio is lower than in some recent quarters, for those taking home R20,000 or more, the unsecured debt levels were 39% higher. For top earners, the figure is 50%.

This directly results from the erosion of net income (take-home pay), resulting in consumers’ need to supplement this erosion with unsecured credit.

Total debt levels (including secured and unsecured debt) have increased by 17% compared to 2016; this increase is lower than inflation and unsecured debt growth. “It confirms the view that unsecured debt is used as a lifeline for many income groups to supplement their incomes,” said the report.

Read: South Africans are in survival mode 

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