Financial vulnerability index at an all-time low

By Martin Hesse, Opinion Time of article published Sep 8, 2020

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Words on Wealth:

Last week, Momentum released the second-quarter 2020 report of the Momentum/Unisa Consumer Financial Vulnerability Index and, not unexpectedly, it makes for depressing reading. At the end of June, the index, at 35.4 points out of 100, was at an all-time low in its 11-year history, having dropped a record 11.8 points, from 47.2 in the first quarter.

The historical high point was in the first quarter of 2012, when it reached 58.87 points.

The index relies not on direct responses from consumers, but on the input of 75 “key informants” from relevant industries, such as banks, insurers, credit bureaus, retailers, municipalities and consumer research agencies.

The report was compiled by Professor Carel van Aardt and Jacolize Meiring from Unisa’s Bureau of Market Research, and Johann van Tonder, economist and researcher at Momentum.

On the 0-to-100 measurement scale, the lower the score, the higher the level of vulnerability. The broad divisions are as follows:

  • Financially secure (60 to 100): the consumer’s cash flow is secure, with little threat of him or her becoming financially vulnerable.
  • Financially exposed (40 to 59.9): the consumer’s cash flow is affected to the extent that there is a high risk of becoming financially vulnerable.
  • Financially vulnerable (0 to 39.9): cash flow is affected to such an extent that the consumer experiences feelings of financial insecurity and of being unable to cope.

The index comprises four components, each of which has a separate vulnerability score:

  • Income;
  • Expenditure;
  • Savings; and
  • Debt servicing.

For the second quarter, the score of each of these was below 40 – that is, in the “financially vulnerable” bracket. Never before have these scores been so low. The lowest score, again not unexpectedly, was debt servicing, at 32.09.

The respondents were fairly mixed on whether the third quarter would be worse than the second: 46.4% said the financial position of consumers would be worse, with 40.6% expecting sharp increases in prices and 50.7% expecting a sharp increase in unemployment.

On how long it would take for consumer finances to recover, only 10.1% said it would take within a year; 36.2% expected it to take between one and two years; and the majority, 53.6%, reckoned it would take more than two years.

The respondents expected increased pressure on consumers’ savings and a decreased ability to service debt. On the other hand, they see some potentially positive behavioural changes to come out of the Covid-19 crisis: consumers are changing the way they spend their disposable income, reducing unnecessary travel, working remotely and relying more on online retailers.

The main interventions or changes that the respondents suggest for consumers to recover financially from the pandemic include:

  • An improvement in the local economy to stimulate job creation.
  • Entrepreneurship and complementary income streams.
  • Financial discipline and financial literacy.
  • Restructuring expenditure to prioritise needs.
  • Government support for businesses and individuals.
  • Making the repayment of debts a priority.
  • Increased savings.

Risky business

Why in these depressed times, when we should be trying to be as prudent as possible, has there been an uptick in two of the riskiest activities we can be doing with our money: gambling and forex trading (which is akin to gambling)? TV channels are peppered with online gambling commercials, while the forex trading sites prefer YouTube as an advertising medium, and reports suggest that these businesses are making a killing.

I’ve written before about the risks of forex and CFD (contracts for difference) trading, but, following this burst of activity, I’ll revisit the subject in next week’s column.


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