Credit Stress on the South African Consumer
South African consumers have experienced five lending rate increases in less than a year – amounting to the largest total increase in nearly two decades – with another one likely this week. Coupled with the petrol price pushing through the psychological barrier of R20 per litre at the start of the year, and the knock-on effect this had on product inflation, consumers will be changing spending behaviour in response to these shocks. This blog unpacks how four different consumer segments will be affected, using its ENS solution and results from its recent 2022 Q2 Credit Stress Report. The segments examined are Comfortable Retirees, the Mass Credit Market, Middle Class Workers and Heavy Hitters.
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The Eighty20 National Segmentation (ENS) Customer Profiling Tool, while protecting customer privacy and data protection, enables the most comprehensive view of South African adults (aged 15+). Using statistical techniques to overlay diverse datasets, including bureau, national and regional surveys, over 1,000 variables are mapped to each of 42 million adult South Africans. Consumers are mapped to one of 1,500 micro-segments, 48 sub-segments and 8 segments using either SA ID, mobile number or key variables such as age, income and gender.
Repo rate and the cost of credit
The repo rate is the rate at which the Reserve Bank lends money to banks. Because other lending and interest rates are linked to the repo rate, a hike in the repo rate results in the interest rate on your home and vehicle loan increasing. In the past year, the Reserve Bank has raised the repo rate five times, a full 200 basis points, which is alarming in the context that it only has six opportunities to change the rate every year.
The Mass Credit Market is less likely to feel the impact of rising interest rates as few in this segment have home or vehicle loans. But nearly 50% of this segment’s loan value is in high interest rate unsecured debt.
“For those with retail credit, these increases are unlikely to have much effect since the maximum allowable interest rate for a retail credit facility is 17.5% per annum. Most stores already charge this rate on their credit accounts. This also applies to unsecured loans or credit cards, as there are no assets attached to a personal or unsecured loan, the interest is already much higher than the rates charged on a mortgage or car loan,” says Andrew Fulton, Director at Eighty20.
This means the Mass Credit Market is more likely to feel the pinch in their everyday spend on clothing, food and transport. Some 80% use retail credit to purchase the items they need (nearly 10% higher than the national average).
For those with mortgages or car loans – namely the Comfortable Retirees, Middle Class Workers and Heavy Hitters – the increases have definitely been felt. With the prime lending rate moving from 7% to 9% since this time last year, and most of these types of loans carrying a floating interest rate linked to the prime interest rate, mortgage and vehicle asset finance holders will be paying significantly more on their instalments coming out of Covid.
The impact of these forces on product inflation
The increase in fuel costs, coupled with supply chain issues coming out of Covid (compounded by the Russia-Ukraine war) have created a perfect inflation storm that most people feel every time they go out for a meal, or pay for their groceries.
Because of the nature of these multiple variables affecting the price of consumer goods, inflation rates differ dramatically from item to item.
Annual Inflation by Product – July 2022
Impact of key consumer segments
The impact of inflation and interest rates on the three ENS segments with Mortgage and Vehicle Asset Finance can be described as follows:
- Comfortable Retirees
When inflation is rising, the hardest hit are often older people living on a fixed income pension, as their spending power drops without possible salary increases. Roughly half a million of these retirees have a mortgage, and with the rise in interest rates will put further pressure on their spending. This segment has low default rates overall, but nearly half of those with unsecured credit (roughly 400,000) are in default (90+ days in arrears).
- Middle Class Workers
With no government support by way of grants or pensions, coupled with an appetite for private health, education and security, this segment will be hit hard. The costs of these services will rise with inflation, and just over a fifth of the 4.1m will face higher instalments on their vehicle and home loans. This segment is also at risk for retrenchments in a contracting economy.
- Heavy Hitters
Even the wealthiest 3m South Africans will be impacted by inflation and interest rate increases. This segment accounts for 61.5% of the total loan value in South Africa, and on average, each person has five loans. While this segment has the lowest proportion of individuals in default, those with mortgages with a high-loan-to-value ratio, and no savings, will be under financial pressure.
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