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Repo rate hikes, more woes for consumers

With the prices of food, fuel and electricity increasing, South African consumers, hard hit by rising inflation, are rethinking the way that they shop.

With the prices of food, fuel and electricity increasing, South African consumers, hard hit by rising inflation, are rethinking the way that they shop.

Published Jul 31, 2022

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Johannesburg - The interest rate hikes, which have already gone up by 200 basis points (bps), are expected to push consumers further into the doldrums and eat away at what gets left of their disposable income.

What’s worse is that experts believe the SA Reserve Bank (SARB) will continue increasing the interest rates, adding more financial stress for consumers already struggling to manage their debt repayments.

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Last week interest rates were hiked by a 75 basis points to 5.5%.

Meaning interest rates have gone up by 200 basis points since November 2021.

Kevin Lings, a chief economist at Stanlib, said South Africans should brace themselves for more headaches as the SARB is expected to increase interest rates over the next few months, while inflation is likely to remain above 7%.

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He said this would increase financial distress, especially for those already struggling to manage their debt repayments.

“This applies especially to individuals that have made excessive use of unsecured credit in recent years and were already struggling to manage their debt repayments before the start of the current interest rate hiking cycle,” said Lings.

He said that while the options available to households to deal with the current increase in financial distress are limited, the following factors might offer some support.

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First, cut back on the use of any additional debt, most especially consumption credit in the form of personal loans, credit cards, and store credit.

Consumers feeling the pinch.

Second, avoid accessing long-term savings (pension funds, etc) to maintain daily consumption patterns. Instead, look at ways to restructure existing debt in consultation with a bank or retailer.

“Also, try to avoid purchasing items that can be delayed, especially luxury consumption,” said Lings.

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Another economist, Lara Hodes, warned that the large increase in interest rates, with more to come, will eat further into the disposable incomes of the indebted and have a severe effect on household consumption, with consumer confidence already notably depressed in Quarter 2 of 2022.

“And with household expenditure accounting for two-thirds of GDP, this will quell economic activity,” she said.

Statistics SA has recorded an increase in the number of civil judgements for debt by 7.4% in the three months ended February 2022, compared with the three months ended February 2021.

Data from debt counsellor, DebtBusters, also shows that debt exposure has worsened for most income groups in South Africa in recent years.

The report, released in May, showed that, on average, consumers had 20% more unsecured debt in 2022 compared to 2016.

Those taking home R20 000 or more have unsecured debt levels 54% higher than in 2016.

DebtBusters added that the average loan size has increased by 27% in a few years, and the number of debt obligations (open trades) has decreased by 18% over the same period, indicating that consumers have more debt per credit agreement and are seeking help sooner.

With formal credit, the National Credit Act prohibits creditors from giving credit to consumers who can’t afford to pay it back, but this definitely still happens.

FNB also published its data in May, showing that it takes an average of five days for a middle-income consumer to spend up to 80% of their monthly salary.

This suggests that the average middle-income consumer, earning between R180 000 – R500 000 per annum, survives on 20% of their monthly salary for more than 20 days.

In addition, salaried middle-income consumers with secured and unsecured credit spend, on average, 30% of their income on unsecured credit and 35% on secured credit.

Credit Matters chief executive Roger Brown said debt counselling agencies had seen desperation and despair as many have become paralysed with their debt burden.

“For the first time, we are seeing a tightening of the belt, including the financial middle class who have been dealt a serious blow to their need for ‘conspicuous consumption’ and aspirational wealth.

“Their dreams lie in tatters with each round of lay-offs, short time, lack of salary increases and historic bonus cancellations,” said Brown.

National Credit Regulator spokesperson Didi Sebothoma attributed the challenges to rising inflation and stagnant or reduced income due to Covid-19 and other economic challenges.

“We appeal to consumers to remember that credit is expensive.

“Loans should only be taken when needed,” Sebothoma said.

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