The turn for debt-ridden South Africans is coming, says Nedbank
South African consumers in debt should receive some relief in the coming months as interest rates start to fall.
According to Nedbank’s latest assessment of the broad money supply and credit, household credit growth eased from 3.4% in May to 3.3% in June.
Nedbank said that this reflects the impact of 15-year high interest rates, weak labour market conditions, subdued earnings and tighter lending standards among commercial banks.
The performance of certain subcategories also remained mixed.
Home loans and overdrafts moderated further, and home loans fell for the third straight month in June.
Instalment sales and leasing finance increased marginally to 6.3% from 6.2%
Credit card usage also jumped from 9.5% to 10.7%.
“We expect credit growth to remain relatively subdued during the third quarter as the economic environment remains relatively weak,” said Nedbank. “Household credit demand will likely weaken further.”
“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.”
However, Nedbank expects the South African Reserve Bank (SARB) to cut rates by 25 bps in September and another 25 bps in November.
“This implies that households will only receive some, albeit modest, relief towards year-end.”
“Corporate credit demand will likely remain firm in the second half of the year due to last year’s lower base and increased activity in the renewable energy sector.”
“Bank credit growth is forecast to end the year around 4% before accelerating to 6% in 2025 as interest rates fall further, structural reforms gain some traction, and economic growth improves.”
Several economists and analysts expect the SARB to start cutting in September now.
According to Old Mutual Wealth Investment Strategist, Izak Odendaal, the cutting cycle hinges on the next move by the US Federal Reserve (US Fed), “the most important central bank”.
The US Fed is unlikely to cut this week, he said, but should start laying the groundwork to start easing in September.
While the US inflation rate is not at the Fed’s target yet (2%) it is heading in that direction. Central banks need to make policy today for what the economy will look like 12 or so months down the line, Odendaal said. This is because it takes time for interest rates to impact the economy.
South Africa is expected to start cutting rates around the same time as the Fed.
Bank of America brought forward the start of the South African hiking cycle from January 2025 to September after two of the six monetary policy committee (MPC) members called for a 25 bps cut in the July meeting.
Interest rate cuts are becoming increasingly likely in the near term due to inflation nearing the 4.5% target (5.1% in June), the rand’s strengthening after the formation of the Government of National Unity (GNU), and the US Fed’s expected start to cutting rates in the near future.
“Once the SARB’s cutting cycle commences, it will provide the indebted with some relief and should boost sentiment, supporting the property market,” said Investec Economist Lara Hodes.
Odendaal warned, however, that the Fed and other central banks are unlikely to launch into aggressive rate cuts, as there will be lingering concerns that inflation could flare up again.
“They will be wary of declaring victory too quickly. For one thing, global supply chains are still very tightly wound and subject to disruptions. The recent global IT outage grounded several large airlines and was a foretaste of what could go wrong, though it was thankfully brief,” he said.
As such, the analyst said that rate cuts are likely to be modest and slow—unless there is a sharp slowdown in which case rates will be reduced quickly.
“The good news is that there is substantial room to cut rates and provide support should this be necessary,” he said.
South Africa’s debt problem
The cuts will be welcomed by many of South Africa’s population, with data showing that the population, especially the wealthy, is taking on unhealthy levels of debt.
Experts said that debt-to-income levels of between 30% and 40% can be incredibly dangerous for consumers.
Consumer insights and data science firm Eighy20 measures consumer financial health using an “instalment-to-net income ratio,” which is calculated based on net monthly income or income after tax.
The median instalment-to-net income ratio shows that South Africa’s population spends 54% of its income on debt.
This rises to 56% for the middle class (personal income of R15,000) and 63% for the nation’s heavy hitters (top 5% of income earners).
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