Middle class hanging on by a thread in South Africa – and cutting interest rates won’t help

Banks are now expecting interest rates to stay higher for longer in South Africa, and the middle class is hanging on by a thread – with little to no relief on the horizon for the next two years.

Following the release of Standard Bank’s end-of-year results in March, CEO Sim Tshabalala said the global economic environment continues to be marked by uncertainty and supply shocks from conflicts in Ukraine, the Middle East, and Africa. 

Although none of the bank’s operations have been directly affected by recent global events, they have put pressure on economies all across Africa.

Tshabalala noted South Africa, in particular, has been hit hard due to its small but highly open economy, making it vulnerable to external shocks.

Standard Bank predicts that there will only be a slight moderation in inflation in 2024, with an average of 5% throughout the year.

This is at the upper end of the Reserve Bank’s target range of 3% to 6%, which means that significant rate cuts are unlikely to happen.

As a result, Standard Bank only expects the Reserve Bank to reduce rates by 75 basis points in 2024, beginning only in September.

Economist Neville Berkowitz highlighted that this is very bad news for middle-class South Africans, who have a tough two-year ride ahead of them.

The middle class is facing a dire financial crisis.

According to the latest Eighty20 Credit Stress Report, middle-income households earning an average of R25,000 a month and individuals earning an average of R15,000 a month are already burdened with spending 79% of their monthly income to pay on credit instalment payments.

However, Berkowitz pointed out that – after deducting an average tax rate of 8.2% – they spend closer to 86% of their take-home pay on instalment debt repayments.

“In December 2021, most of the 3.5 million credit-indebted middle-class people spent R1 out of every R2 of their take-home pay on credit instalment payments.

“By December 2023, this had increased to R4.30 out of R5 as interest rates jumped 120% from November 2021 to May 2023,” he said.

Given the position middle-class households find themselves in, Berkowitz sees a grim picture and a worsening situation.

Several economists expect interest rates to decrease only 1.25% p.a. during 2024-2026.

Berkowitz firmly believes that such a slight projected drop in interest rates will unlikely alleviate the increasing financial strain on the middle class’s indebtedness.

The average indebtedness of the middle class is R152,715 and a monthly drop in the interest rate of 1.25% p.a. will save them only R159 a month.

“In an economy with near-zero growth, salary and wage increases will lag the inflation rate,” he said.

What’s worse, when you add higher tax payments, inflation remaining around 5-6% p.a., a potential 1% increase in VAT after the May 2024 General Election, and other rising costs for the middle-class bears – any interest rate savings will be quickly wiped out, and monthly expenses will increase, he said.

“Unfortunately, there is little to no reprieve in sight for most of these well-over-borrowed middle-class people in the foreseeable future,” said Berkowitz.

He added that things would get even worse as conventional lenders like banks start tightening their lending policies as bad debts skyrocket.

“For those able to borrow from unconventional lenders, this could see their take-home pay to credit instalment payments increase, breaching 90% for specific well-overcommitted higher interest-paying middle-class borrowers by year-end.

“They will try to live on the remaining 10% of their take-home pay – R1340 a month or R45 daily. A household with R22,000 in take-home pay will have R2,200 a month or R73 daily for living expenses,” he said.

Berkowitz noted that the consequences for the middle class are potentially disastrous over the next two years as they are financially stretched further each month, waiting for a meaningful drop in interest rates – which is not on the horizon until at least 2027.

Read: Big turn for South Africans earning more than R20,000 a month