Households are on a borrowing spree, according to John Loos, a strategist at FNB. He said interest rate policy should focus not only on inflation but should “also aim to contain household sector credit growth to lower single-digit growth rates”.
Yesterday the Reserve Bank reported a decline in overall credit growth to 8.3 percent year on year last month, from 8.4 percent in June. The slower pace of total borrowing, which masked the different trends in certain types of credit, was due to a lack of activity in the mortgage market and a loss of momentum in corporate credit.
Loos said: “Using bank BA900 data, only available up until June but good enough to illustrate where the pressures lie, we see total growth in non-mortgage household lending at 21.2 percent year on year. This would appear extreme given the current mediocre state of the economy.”
Non-mortgage household credit includes instalment sales, which was “strongly driven by vehicle finance”, Loos said. It also includes unsecured lending such as personal loans and credit card debt.
Strong growth in unsecured credit was on the agenda at a meeting between Finance Minister Pravin Gordhan and bank chief executives on Monday.
Loos warned: “High credit growth rates back in the boom years led the household debt-to-disposable income ratio to about 83 percent by early 2008.”
Though the country’s household debt-to-income ratio had fallen to 74.7 percent by the first quarter of this year, Loos said it should be below 70 percent before the rate hiking cycle started. But a further decline would be difficult, he said.
“The growth in the domestic wage bill in the first two quarters of the year was 7.6 percent and 8.1 percent year on year, respectively, significantly lower than a year or two before. Growth in credit is reaching a level very close to the slower wage bill growth rates, implying it may be increasingly difficult for nominal disposable income growth to outpace household credit growth, a requirement for the debt-to-disposable income ratio to decline further.”
The situation presents a dilemma for the Reserve Bank’s monetary policy committee (MPC). A cut in the bank’s repo rate from 5 percent would give indebted households a chance to reduce their debt; alternatively it could encourage them to borrow more. The MPC meets next month and in October.
While households are making hay, corporates are losing their appetite for credit, according to the data.
Leon Myburgh, a strategist at Citi, said: “Growth in corporate borrowing declined as demand for unsecured loans reduced. [Growth in] other loans and advances to corporates dropped from 12.4 percent year on year to 8.3 percent.
“This form of borrowing makes up around 40 percent of corporate borrowing activity.”