South Africa’s middle class is in deep trouble
Although South Africans are starting to see a slight improvement in their financial circumstances, the middle class is still drowning in debt.
This is according to Eighty20’s latest Credit Stress Report for the fourth quarter of 2023, which showed optimism was short-lived as Q4 blended both positive and negative indicators, with the unemployment rate increasing slightly, inflation creeping up, and consumer confidence dipping down again.
Eighty20 noted a significant improvement within the credit sector as the percentage of loans in arrears decreased by a whole percentage point in Q4.
According to the report, the credit-active population continued to grow by 2.3% year-on-year (YoY).
However, the proportion with more than one loan in default decreased for the second quarter in a row to 45.5% – down 3.3% quarter-on-quarter (QoQ) and 3.1% YoY.
Despite the positive signs, the report noted that South Africans are still financially strained – with the middle class especially in a very deep hole.
Eighty20 defined middle-class workers as those households with an income of nearly R25,000 a month or a personal income of R15,000, while heavy hitters represent the top 5% of income earners in South Africa.
The resort notes concerningly that the middle class took on a lot of new debt in the fourth quarter, with the number of new loans granted increasing by 9.2%, with increases of 22% for new VAF loans, 15.6% for new retail credit loans and 8.6% for new unsecured loans.
Overdue balances increased by 1.4% QoQ to R77 billion, driven primarily by a 2.7% QoQ increase in unsecured loan overdue balances.
Despite this, VAF overdue balances decreased by 14%; however, this is due to the middle class not having enough room to afford new vehicles.
The report also showed that the overall instalment-to-net-income ratio for all South Africans is 47%. This means that nearly half of the net income of all credit-active people goes towards servicing debt.
Debt levels are the highest for the Middle Class, at 79% of income going to instalments (up by nearly 28% in just over two years), followed by the Heavy Hitters at just over 61%.
In contrast, the Mass Credit Market pays 39% of their income towards debt, with Comfortable Retirees at just over 45%. All of these figures have been rising since 2021 Q3.
These trends are fuelled by stagnant income growth and individuals responding to inflationary pressures and rising interest rates by seeking larger unsecured loans.
Over the past seven years, average take-home pay has increased by just 1%, while inflation has surged by 40%.
To cope with this financial strain, people have increasingly turned to retail loans for clothing and homeware purchases, relying on unsecured loans and credit cards for other expenses.
Notably, credit card balances have demonstrated double-digit year-on-year growth for eight out of the last 10 quarters, peaking at 15% in mid-2022.
As a consequence, All major listed banks acknowledged the impact of credit impairments on their 2023 financial results.
African Bank revealed it had to double its provisions to account for bad debt, whereas Standard Bank noted that while its credit impairment charges had decelerated, they remained at elevated levels.
This resulted in banks and retailers adopting stricter measures in extending credit to new customers, alongside writing off overdue debts, said Eighty20, which could also be the reason for the second consecutive QoQ decline in the proportion of loans in arrears.
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