‘2013 likely to be bottom of debt-service cycle’

Johannesburg‚ Jan 31 (I-Net Bridge) - 2013 is expected to be the year when the trend of improvement in the servicing of household debt comes to an end‚ as the South African Reserve Bank starts to allow household debt servicing costs to rise‚ FNB household and consumer sector strategist John Loos said on Thursday.

Reserve Bank data show that the household debt-service to disposable income ratio eased to 6.5% in the third quarter last year from a recent cyclical peak of 12.7% in the third quarter of 2008.

“Since 2009‚ we have seen major improvements in debt repayment performances by the household sector‚ as the debt-service ratio (the cost of servicing debt‚ interest + capital estimate‚ expressed as a percentage of disposable income) has declined. The debt-service ratio is a fairly good predictor of household sector debt servicing performance. Sharp interest rate cuts from late 2008 were the main contributor to this improvement‚ but to a lesser extent some decline in the household debt-to-disposable income ratio from an all-time high of 82.7% as at early 2008 also helped‚” he said.

The Reserve Bank said that the household debt to income ratio was 76.0% in the third quarter 2012 from a record 83.0% in the first quarter 2009.

The annual average in 1995 was only 59.4%.

“Not surprising‚ the pain of rising interest rates from 2006 to 2008 caused lenders and borrowers alike to go more lightly on lending/borrowing‚ and household sector credit growth slowed all the way from a 28.2% peak in February 2006 to 2.6% by November 2009. This slower credit growth‚ accompanied by improved economic and household disposable income growth‚ allowed some moderate decline in the debt-to-disposable income ratio from 82.7% at the beginning of 2008‚ to 75.2% by the end of 2011‚” he noted.

Loos said however‚ that last year the debt-to-disposable income ratio started to rise‚ slightly raising the debt service ratio early in the year. The Reserve Bank countered this effect of a rising debt-to-disposable income ratio with a further interest rate cut in July last year‚ and the indicators of debt servicing performance continued to improve‚ albeit at a slowing rate.

“Moving forward‚ the question is‚ will the debt-to-disposable income ratio continue to rise‚ taking the debt-service ratio higher in the expected absence of further interest rate reduction? And will this in turn lead to the end of the improvement in household sector debt servicing performance? I believe‚ yes. Already‚ in line with a no-longer declining debt-service ratio‚ we have seen the year-on-year rates of decline in both civil judgements in individual debt and insolvencies tapering off. No noticeable deterioration yet in 2012‚ therefore‚ but a definite slowing pace of improvement‚” he said.

“While I don’t believe that the peak in household sector credit growth has yet been reached‚ it is conceivable that recent ’verbal intervention’ by National Treasury‚ where it posed serious questions to banks regarding the wisdom of strong unsecured lending growth‚ may have some impact in terms of throttling back credit growth momentum‚ so the broad acceleration in household sector credit is not expected to go too much higher this year‚” he said. - I-Net Bridge