Tough times for middle-class South Africans earning R15,000 a month
South Africans are generally starting to see an improvement in their financial circumstances, but the middle-class is still struggling to turn things around.
During the third quarter of the year, inflation eased closer to 5.0% from 6.2% in the prior quarter, unemployment returned to pre-Covid levels, consumer confidence increased, and the percentage of loans in arrears dropped to 37.5%.
According to Eighty20’s latest credit stress report, the rate of new defaults (RNB) (the proportion of outstanding loan balances that went into default during the quarter across all loan products) also trended downwards over the quarter, except for vehicle asset finance – a welcome reprieve from the double-digit YoY growth in the last three quarters.
“The RND is at 2.51%, up 25% from 2.01% a year ago. Although the annual change in the rate of new defaults (CRND) remains high, it is down 1.3% in the last quarter. The CRND is an early warning sign for the state of credit in the country,” Eighty20 said.
Only middle-class workers (personal income of R15,000) experienced an increase in the overall RND from Q3 2023 – but this was still only a 0.2% increase.
Eighty20 gave three potential explanations for these results:
- Hypothesis 1: Things are getting better – people are managing their finances, cutting back on spending and making payments on debt
- Hypothesis 2: Things literally couldn’t get any worse – anyone who was going to default has already gone into default
- Hypothesis 3: Credit providers have become significantly more risk averse in their lending and are, therefore, giving loans to people less likely to default
However, it is likely that this is probably a combination of all three factors.
“The credit card numbers reflect the hypothesis that people have become more responsible about their debt. While balances are still growing across all segments, albeit at a slower rate, new defaults are down QoQ by 2.1%.
“By comparison, overall loan balances are up 20%, with retail and unsecured up barely one percent,” said Andrew Fulton, Director at Eighty20.
“The four wealthier ENS segments have been relying on their credit cards to make it to the end of the month. As a result, overall credit balances are up more than 30% since Covid – by comparison, overall loan balances are up 20%, with retail and unsecured up barely one per cent.”
Although credit card debt is up 9.5%, this is still significantly lower than the double-digit growth seen over the last two years.
The drop in credit card growth was seen across all segments, with the Middle Class seeing growth at 6.5% YoY and the Mass Credit Market (personal income of R5,000) at nearly 12% YoY growth.
“Despite this slowing growth, the average credit card loan balances for these segments are still twice their average monthly income,” Eighty20 said.
The average instalment-to-income ratio also continued to rise, like credit card debt, but it had declined from last quarter.
“However, we do still see the Middle Class at nearly 75% of their income going to instalments, Heavy Hitters at 60% (personal incomes of R42,000 per month) and the Mass Credit Market approaching 40%.”
“The small improvement in the RND and slowing growth in credit balances may also support the hypothesis that we have reached the bottom, with most credit-stressed South Africans already in default.”
“Furthermore, credit balances for Heavy Hitters and Comfortable Retirees have seen reasonable growth, while the Mass Market and Middle-Class Workers have seen no growth in the value or volume of total loans over the past year.”
Nearly all — or 95% — of the R166 billion increase in credit balances from the last year came from the Heavy Hitters and Comfortable Retirees, with home loan balances accounting for almost two-thirds of this amount.
Home loan balances increased by 9.1% YoY, and, unlike the other loan products, 99% of this is held by three segments: the Heavy Hitters (75%), Middle-Class Workers (17%) and Comfortable Retirees (7%).
Whereas the heavy hitter segment accounted for R90 billion (10.8%) YoY growth in home loan balances, it remained flat for the middle class – bringing the overall increase to R102.7 billion.
Closing the taps
There has also been a substantial slowdown in bank lending amid low economic growth and increasing consumer debt, which accounted for the lack of credit growth in the lower-income segments.
Several banks have also sounded the alarm on the elevated levels of credit impairments. Banks decreasing lending would also focus on less risky segments, hence the QoQ drop in new defaults.
“Regardless of the cause, for the first time in many months, we have seen credit and economic indicators move in a different direction. Given the year we’ve had, some joy towards the end is welcome,” said Fulton.
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