Hammer blow for middle-class South Africans earning R25,000 per month
The recent Altron FinTech Household Resilience Index (AFHRI) shows that households in South Africa have been hit hard by financial pressures—especially the middle class, who earn around R25,000 per month.
In this challenging economic environment, salary growth has struggled to keep up with inflation and other rising costs.
Maintaining financial stability has become increasingly difficult for middle-class families as household budgets feel the squeeze.
A significant factor contributing to this strain is the high interest rate environment. Since the Reserve Bank adopted a restrictive monetary policy at the end of 2021, interest rates have surged, reaching a prime overdraft rate peak of 11.75%.
According to the AFHRI, this dramatic increase has translated into higher household debt servicing costs.
Over the past two years, these costs have jumped from 6.7% to 9.1% of disposable incomes, a 36% rise that has placed a substantial burden on the average budget.
More South Africans are finding themselves allocating larger portions of their income to debt repayments, leaving less room for essential expenses.
This issue is particularly concerning for middle-class households, which play a crucial role in driving consumer expenditure in South Africa.
In South Africa, there is no official definition of the middle class, and estimates vary widely.
However, Stats SA reported that the average wage for formally employed non-agricultural employees in South Africa is R27,450 per month.
Additionally, in its latest Credit Stress Report, Eighty20 also noted that households with an income of around R25,000 a month and a personal income of R15,000 can be defined as middle-class workers.
The DebtBusters’ Debt Index report for the second quarter of 2024 underscores the financial strain within this group, revealing that the debt-to-income ratio for earners between R20,000 and R35,000 stands at a daunting 128%.
Although this ratio is lower than that of the top income bracket, it still indicates significant stress.
This dire situation is shown in the graphs below.
The AFHRI also highlights that, despite high interest rates, inflation has not decreased as anticipated.
Global supply chain disruptions, rising shipping and fuel costs, and other supply-side factors have kept inflation elevated.
As a result, the restrictive monetary policy has done little to combat inflation while substantially limiting household spending power.
This combination of stagnant wages and rising costs has eroded purchasing power, as AFHRI data reveal that real changes in household disposable income are negative.
In practical terms, this means that households have less money to spend after accounting for inflation, forcing many families to prioritise essential expenses at the expense of savings or other financial goals.
These financial challenges carry broader economic implications. As household spending declines, so does demand across the economy.
Lower demand affects business revenues, which subsequently impacts job creation and overall economic growth.
The AFHRI report notes that employment growth has been sluggish, with formal sector employment rising at a mere 0.1% annually in recent years.
Coupled with persistently high unemployment, this lack of growth has only deepened financial insecurity for many families.
With limited income and few job prospects, default rates on debts have risen, and the prospects for long-term financial resilience are bleak.
The financial strain is not limited to immediate household concerns but also affects long-term economic stability.
Many South Africans are unable to save or invest, as seen in the slow growth of household wealth relative to income.
The report estimates that if debt servicing costs had not increased so significantly, household disposable incomes might have been R172 billion higher.
This added income could have provided a crucial boost to consumer demand and tax revenues, underscoring how the restrictive monetary policy may not be the most effective solution for the country’s economic challenges.
The AFHRI findings suggest that alleviating the pressure on households may require a different approach.
Lowering interest rates could offer relief, potentially improving consumer confidence and encouraging spending.
This shift would also benefit the private sector by reducing borrowing costs for businesses, thereby fostering investment and job creation.
As it stands, the financial outlook for the average South African remains challenging.
With salaries failing to keep pace with inflation and debt costs reaching new heights, many households are struggling to stay afloat.
This situation calls for thoughtful policy adjustments to ease the financial burden on South African families, boost economic growth, and pave the way for a more resilient middle class.
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