South African consumers are feeling very vulnerable to pressure on their finances, according to the recently released Unisa/Momentum Consumer Financial Vulnerability Index (CFVI) report for the end of the second quarter. Not since the index was established in 2013 have all four of its sub-components been below 50 points on the 100-point scale and in the “very exposed” category.

The four sub-components on which the CFVI is calculated are a household’s income, expenditure, savings, and its ability to service its debt. 

The categories of vulnerability are: extremely vulnerable (below 25 points), very exposed (25 to 49.9), mildly exposed (50 to 74.9) and extremely secure (75 to 100). 

The overall index is down sharply by almost three points, to 48.4, on its first-quarter figure of 52.3. This was slightly down on the fourth-quarter 2016 figure of 52.7.

The report says: “South African consumers witnessed a mix of adverse economic events and negative political developments. This translated into a sense that a ‘perfect storm’ had started, and these perceptions are reflected in the CFVI second-quarter results. The [decline in the index] indicates that consumer finances are now very sensitive to changes ... even a slight mishap will have a severe impact on the average consumer’s cash-flow situation.

“This means that, compared with the first quarter of this year, consumers (in general) experience uncertainty regarding their income and believe that they can’t buy what they used to buy, are struggling to pay accounts and debts, and are unable to save sufficiently for retirement and other goals. 

“Being very exposed in all four sub-components is a very dangerous situation, because it means that consumers don’t have a ‘fall-back’ option, as is the case with being mildly exposed. When in the mildly exposed category, consumers are indicating that they feel like they will be able to juggle between components to make things work. The new status quo means consumers will have to consider giving up doing well in more than one sub-component to do better in another.”

The report says various economic and political events affected consumer vulnerability in the second quarter. It quotes a recent Grant Thornton study that concluded that political instability and the ensuing downgrade of the country’s debt were the main reasons for the country’s economic woes. 

It says consumer and business confidence were also low during the second quarter, mainly because of:

• Increases in personal income tax rates that became effective during the second quarter and had a negative impact on consumers’ disposable income. These increases may have offset any modest, real (after-inflation) increase in salaries and wages.

• A high unemployment  rate that fuelled higher levels of uncertainty about job and income security, and dampened the outlook for new employment opportunities. With 112 000 fewer people employed during the quarter, the unemployment rate increased to 36.4%.

• A decline in credit extension by banks and retailers, which led to households having to adjust their purchasing and spending habits.

The report says employers need to be “sensitive to the current situation and avoid hasty short-term decisions that may have significant negative implications for the financial wellness of their business, employees and the economy. 

“There are specific steps employers wishing to decrease employees’ financial vulnerability can take, in order to improve financial literacy, budgeting practices and other financial management behaviours across their workforce.”

Current outlook

Although South Africa’s GDP turned positive after two quarters of being negative, life for consumers has not necessarily improved in the third quarter. 

One of the compilers of the CFVI report, Jacolize Meiring from the department of taxation at Unisa, says consumers’ finances will most likely remain constrained in the near future by higher transport costs due to rising fuel prices and no relief in the form of an expected interest rate cut. 

“Job losses that occurred during the second quarter, as could be seen from StatsSA’s quarterly employment statistics released this week, also adds pressure to consumers’ income-earning abilities, and the general confidence in the economy remains low. We therefore do not expect an improvement in consumers’ financial vulnerability in the very near future,” Meiring says.

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