Desperate South Africans are burning through credit to survive

 ·31 May 2024

The latest data on broad money supply in South Africa shows that households are still burning through credit each month, pointing to growing strain as high interest rates keep consumers down.

Annual growth in broad money supply decreased to 5.7% in April after an unexpected rise to 6.8% in March.

The number was weaker than market forecasts of 6.4%.

Overall credit demand by households decreased to 3.4% y/y from 3.7% y/y previously. Mortgage advances—which make up a significant 59% of household credit—fell further to 2.8% y/y from 3.0% and 3.3% y/y recorded in March and February respectively.

According to Investec economist Lara Hodes, residential property demand continues to be impacted by the fragile economic environment, with “consumers still grappling with a high-interest rate environment and subdued confidence levels”.

“Expectations are that interest rates have reached a peak and the next move by the SARB will be a cut, although the anticipated time frame could be pushed out somewhat, with inflation still notably above the midpoint of the targeting range,” she said.

“Once the cutting cycle commences, it will provide the indebted with some relief and should boost sentiment, supporting the property market.”

Nedbank noted that household credit growth is at its weakest point since March 2021.

“All the subcategories, except overdrafts, experienced either further growth moderation or a decline as the impact of higher interest rates continued to bite, poor economic prospects and the poor labour market eroded household confidence, and commercial banks were more cautious in extending credit,” it said.

Among the credit categories, growth in credit card usage remained firm at 9.5%, even though it moderated from 10.4%, while overdrafts increased further to an almost two-year high of 3.2%.

The banks said that this indicates increased usage of credit to finance essential spending.

“Credit growth is likely to remain subdued in the months ahead as the base effect recedes and the economic environment remains weak.

“Household credit demand will likely weaken further, only turning the corner around the final quarter of the year,” Nedbank said.

While real incomes will recover as inflation recedes, the pressure from high interest rates will likely persist for longer amid sticky global and domestic price pressures, it said.

The bank said that it still expects interest rate cuts to come in 2024, with the first 25 basis point cut showing up in September, followed by another 25 basis point cut in November.

This has been one of the more optimistic outlooks for the start of the interest rate cutting cycle, with more bearing views only seeing rate cuts in 2025.

“This implies that households will only receive some, albeit modest, relief towards year-end. The 2-pot retirement system also comes into effect in September and could significantly boost household income and lift credit demand.

“Our forecast for the consumer market could face downside surprises as the risk of further delays to the start of the rate-cutting cycle remains high,” Nedbank said.

Read: Reserve Bank holds rates – warns of a longer wait

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