Consumers must cut their spending and reduce their debt if they are to survive what is likely to be a very tough year – and things could get worse if South Africa’s sovereign (government) debt is downgraded to non-investment-grade, or “junk”, status by major international credit rating agencies, financial services company MMI warns.

Mike Schüssler, of economic consultancy, says that, without a rating downgrade, interest rates can be expected to rise by one percentage point – on top of the 0.25-percentage-point rise announced this week – over the short term. If South Africa’s debt is downgraded to junk, rates could rise by between two and four percentage points.

Consumers are feeling despondent about their finances, according to the MMI Unisa Consumer Financial Vulnerability Index, which was launched this week.

Schüssler, who was speaking at the launch of the index, says the rating by Standard & Poor’s (S&P) will be the most significant one, because major institutional investors, such as retirement funds, follow its ratings when deciding how to invest their money around the world.

If S&P downgrades South Africa to junk, it is expected that more money will flow out of the country, exacerbating the situation where South Africa spends between four and five percent more offshore than it earns. This will affect inflation and interest rates, making life extremely tough for consumers.

Rowan Burger, the managing executive: strategy and market development at MMI Corporate and Public Sector, the division of MMI Holdings that services large and medium businesses, says the tough conditions are being driven by:

* High levels of debt relative to after-tax income. He says millions of consumers are caught in a downward spiral of over-indebtedness.

* Low rates of saving.

* Unforeseen expenses.

* Increasing interest rates pushing debt levels even higher and reducing savings.

* Low levels of financial literacy, making it difficult for consumers to constrain spending, reduce debt and increase savings. Burger says that bad financial decisions, taking on too much debt and spending more than you earn are signs of poor financial planning and a lack of personal financial expertise.

* Low levels of real (after-inflation) economic growth, resulting in anaemic job creation in the formal sector. According to the Economist Intelligence Unit, the economy grew by only 1.3 percent in 2015, gross fixed investment slowed to 0.6 percent, and the official unemployment rate increased from 25.1 percent in 2014 to 25.9 percent in 2015.

* High levels of inefficiency in national, provincial and local government, electricity supply constraints, uncertainty over government policy and low levels of profitability in the private sector.

Jacolize Meiring, a senior lecturer and researcher in Unisa’s department of taxation, says some consumers are extremely financially vulnerable, whereas others are not financially vulnerable at all. Some consumers manage their personal finances very well, whereas others are imprudent.

However, she points out the South African consumer landscape is characterised by unequal income distribution, high levels of unemployment and poverty.

She says financial vulnerability is the result of factors that are beyond consumers’ control, such as adverse local and international economic conditions, and those over which they do have some degree of control, such as saving and debt.

Meiring says that, since 2010, the biggest increases in consumer financial vulnerability have resulted from servicing debt and low rates of saving. These two factors seem to be the “Achilles heel” of the South African household sector, with negative savings rates and a debt-servicing arrears rate of nearly 50 percent.


The MMI Unisa Consumer Financial Vulnerability Index measures four consumer perceptions and classifies them into three main categories, each divided into two sub-categories.

Jacolize Meiring, a senior lecturer and researcher in the department of taxation at Unisa, says the following factors should be taken into consideration when assessing consumers’ financial vulnerability, to form a holistic view of how they perceive their financial position:

* Income vulnerability, which is influenced by job security, income growth, government social grants, and the ability to obtain financial assistance from family and friends;

* Savings vulnerability, which measures the savings and assets consumers can access;

* Expenditure vulnerability, which measures whether consumers can deal with the rising cost of food and transport and are living within their means; and

* Debt service vulnerability, which measures the cost of servicing debt and the level of debt accumulated.

The index classifies the results of these components into three categories based on a score out of 100 (the best outcome), namely:

* Financially secure. These consumers have their cash flow under control and there is little threat of financial vulnerability. They are reducing their debt or have no debt, are building up their savings, and are not spending more than they earn. Consumers in this category are divided into “extremely secure” (those with a score of 80 to 100) or “very secure” (those with a score of 60 to 79.9).

* Financially exposed. Consumers’ cash flow is such that they are at high risk of becoming financially vulnerable or insecure. They are teetering on the edge of not being able to repay their debts, save as much as they should, or keep their spending below their income. Consumers with a score of 50 to 50.9 are classified as “mildly exposed”, while those with a score of 40 to 40.9 are classified as “very exposed”.

* Financially vulnerable. Consumers’ cash flow is such that they are, or feel they are, financially insecure and unable to cope. They are spending more than they earn, their debt is probably growing and they are saving nothing or very little. Consumers with a score 20 to 39.9 are “very vulnerable”, while those with a score of 0 to 19.9 are “extremely vulnerable”.


Consumers are becoming increasingly despondent about their financial vulnerability, particularly their ability to repay debt. This is reflected in the MMI Unisa Consumer Financial Vulnerability Index for the period to the end of December 31, 2015.

On average, consumers considered their financial situation to be “mildly exposed”, although perceptions of their financial vulnerability were the brink of being classified as “very exposed”.

Jacolize Meiring, a senior lecturer and researcher in the department of taxation at Unisa, says the position could have been worse, but “end-of-year” factors, such as annual bonuses and pay increases, changed consumers’ perceptions for the better.

Meiring says that, in view of how poorly the economy is performing, “there is a real risk that consumers may become ‘very exposed’ during 2016”.

She says the research shows that the average score for the debt-servicing sub-index is the lowest since the index was established in 2009. It also shows that debt-servicing arrear rates have reached nearly 50 percent.

Rowan Burger, the managing executive: strategy and market development at MMI Corporate and Public Sector, says high debt results in negative savings, adversely impacting on consumers’ financial wellness.

The long-term trend of higher debt-servicing vulnerability is of serious concern. While income, expenditure and savings vulnerability are mainly driven by macro-economic factors, consumers’ ability to service their debt is, in part, affected by consumer behaviour, such as a low level of financial literacy. The environment of rising interest rates is putting pressure on consumers with debt.

Macro-economic factors exacerbated consumers’ vulnerability during 2015. The factors that were on the increase in terms of their impact on consumer financial vulnerability were rising interest rates and unforeseen expenses.

Meiring says there is a clear trend of increasing financial vulnerability. This is reflected by the fact that, between the fourth quarter of 2014 and the fourth quarter of 2015, consumer expenditure vulnerability worsened from 53.5 to 53.2 (an increase of 0.65 percent in the vulnerability score), debt-servicing vulnerability worsened from 49.6 to 48.7 (a 1.73-percent increase) and income vulnerability worsened from 51.4 to 50.2 (a 2.32-percent increase).

Between the first quarter of 2012 and the fourth quarter of December 2015, the increase in consumer financial vulnerability was even more pronounced, with a 12.13-percent increase in savings vulnerability, an 11.52-percent increase in expenditure vulnerability, a 13.92-percent increase in debt-servicing vulnerability and a 12.77-percent increase in income vulnerability.

Overall, consumer financial vulnerability increased by 13.47 percent between the first quarter of 2012 and the fourth quarter of 2015.


If you get into trouble financially, your health is also likely to suffer. This is one of the conclusions reached by financial services company MMI after it correlated death and disability claims with the MMI Unisa Consumer Financial Vulnerability Index.

More employees are likely to take off “sick” from work on pay-day than on other days, particularly if they are heavily in debt, because concerns about debt repayment peak on pay-day, Rowan Burger, the managing executive: strategy and market development at MMI Corporate and Public Sector, says.

“Consumers are worried about the people waiting outside the [company] gate wanting their share of their pay packet.

“When matters get very serious, life assurance companies also see a spike in suicides, as happened last year during the mining industry strikes.”

Burger says that financial vulnerability leads to health vulnerability, and it also affects productivity and family life.

Nomha Kumalo, MMI’s managing executive: organised labour and public sector clients, says debt issues do not affect only low-income workers.

Speakers at the launch of the MMI Unisa Consumer Financial Vulnerability Index this week agreed that one of the problems is a low level of financial literacy.

Raising the level of financial literacy would slow the trend of consumers spending more than they earn and taking on debt to make up the shortfall.

Burger says employers need to play a far greater role in educating their employees about managing in their finances, in the interests of company productivity and employee welfare and improving the socio-economic environment in which they operate.

He says that although many human resources managers recognise the advantages of investing in financial education, many financial directors are concerned only about short-term costs to the company. As a result, MMI has initiated research into the relationship between financial vulnerability and productivity.