It’s commonly thought that debt problems are more prevalent among lower earners, but a recent survey shows that people taking home more than R35 000 a month may be in more trouble when it comes to their debts than is generally recognised.
Last year, 2023, may have been the worst year financially for South African consumers at least since the 2008 global financial crisis. A combination of interrelated factors created a perfect storm: a stagnant post-Covid economy characterised by crippling load shedding and crumbling infrastructure, near-zero wage growth, high inflation and high interest rates.
One way of telling how well consumers are coping financially is by looking at their debt levels and, more pertinently, their ability to service that debt. In a media presentation this week to coincide with the beginning of National Debt Awareness Month, Benay Sager, the chief executive of debt counselling firm DebtBusters, reported on the DebtBusters Debt Index for the fourth quarter of 2023, which shows that South Africa has unsustainably high levels of household debt. This is a survey of people applying for debt review or currently in debt review, so one must take into account that it is not representative of the average consumer. However, the figures give a good indication of how the household debt picture in South Africa is changing.
Sager reminded us of the financial realities facing South Africans. The average annual interest rate on a mortgage bond grew from 8.3% in the fourth quarter of 2020 (when interest rates were at their lowest) to 12.3% three years later. This represents an almost 50% hike in monthly bond repayments. The average interest rate on vehicle finance rose from 12.0% to 15.6% since 2016, and on unsecured debt (personal loans, credit cards and store cards) from 20.9% to 25.6%.
Worryingly, average salaries and wages have remained virtually static (a rise of 1%) since 2016, the first year of the DebtBusters survey, while compounded inflation over that seven-year period was 40%. In other words, an item costing R100 in 2016 cost R140 at the end of last year, and your salary increases over that time would have covered only R1 of that R40 difference.
On top of the reduced buying power of the rand and the stagnation of salaries, you have had to pay substantially more in debt servicing costs, even if you have not taken on further debt. But it appears many people have done just that.
Consumers seeking help
Sager reported that, for the fourth quarter 2023, debt-counselling enquiries grew by 46% compared with the same period the previous year. This may simply indicate that many more South Africans are over-indebted and seeking help, but it may also mean that South Africans are becoming more proactive in trying to reduce their debt and put themselves on a more sustainable financial path.
One way of measuring your debt level is by calculating the ratio of total debt to annual net income. For example, if you bring home R500 000 a year and all your debts amount to R600 000, you have a debt to annual net income ratio of 120%. This will naturally be higher among people with mortgage bonds, who tend to be the higher earners. But this ratio in the top bracket in the survey has increased alarmingly since 2016. Of people earning more than R35 000 a month entering debt counselling, their debt to annual net income ratio has risen from 126% to 171%. More than a third (37%) of this group’s debt is unsecured, 22% is vehicle finance, and 41% is mortgage bond debt.
Another ratio, to better understand how sustainably you are managing your debt, is the percentage of your monthly income you use to pay off that debt. Again, this is higher among higher earners: on average, the over-R35k group entering debt counselling were using 71% of their income to service debt, well above the overall average of 62%.
Anything above around 40% is unsustainable, especially in this high-inflation, high-interest-rate environment, Sager told Personal Finance in an interview last year.
A touch of good news for consumers is that, although there are no signs of a turnaround in the economy, inflation appears to be settling again in the South African Reserve Bank’s 3 to 6% target range and interest rates may have peaked.