Consumers are still under severe financial strain although sentiment has improved since the suspension of load shedding, the formation of a coalition government, reduced inflation and interest rates, and the ability to access some retirement savings.
This is revealed in DebtBusters’ Q3 2024 Debt Index, which was released yesterday.
According to the quarterly evaluation of debt counselling applications, demand for debt counselling increased by 6% compared to the same quarter last year and online debt management grew by 10%, despite a series of positive developments.
Benay Sager, executive head of DebtBusters, said income growth has not kept up with significant cost increases over the past eight years, and consumers were using short-term unsecured credit and personal loans to make up the shortfall.
As a result, consumers need to allocate two-thirds of their take-home pay for debt repayments.
“Eighty-two per cent of people who apply for debt counselling have a personal loan and 53% a payday loan. This, at a time when unsecured interest rates are at 26,7%, close to the maximum 29%,” Sager said.
The Q3 2024 Debt Index showed that consumers who applied for debt counselling had 44% less purchasing power compared to 2016.
Electricity costs 135% more than eight years ago and the petrol price has doubled contributing to cumulative inflation of 46%. Over the same period, nominal incomes have only increased by 2%.
These consumers also had a high debt-service burden. Before coming to debt counselling consumers were spending 66% of net income to repay debt. This is up sharply compared to the last few quarters and is the highest since 2017.
People taking home R35 000 per month use 72% of their income to repay debt and their total debt-to-net-income ratio is 176%. The most vulnerable consumers, who earn R5 000 or less a month, use 75% of their income for debt repayments. These ratios are at their highest-ever levels.
The index showed these consumers had unsustainably high levels of debt if they were top earners. Average unsecured debt levels were 22% higher than eight years ago but were lower than the same period last year.
For people taking home R35 000 or more unsecured debt levels were 52% higher. While only slightly higher than inflation growth, without meaningful salary increases, these consumers need to supplement their income with unsecured credit.
According to the Absa Merchant Spend Analytics Report for August 2024, released last month, it was widely expected that a portion of the Two-Pot retirement system payouts would go towards settling short-term debt and stimulate household consumption.
However, the authors of the report said their preliminary internal merchant data indicated a muted activity in consumer spending and transaction volumes for September this year.
This suggested that factors such as delayed payouts, the processing of tax directives, consumers channelling funds towards reducing debt and consumer uncertainty about withdrawing retirement funds may have contributed to a muted activity in consumer spending.
Isana Cordier, head of consumer goods and services sector coverage at Absa Corporate and Investment Banking, said a rebound in consumer spending may depend on the improvement of economic conditions, such as interest rates, inflation, and employment levels.
“For the time being, we will wait and observe whether the 2-pot retirement reform, combined with the current improving economic conditions, will bring positive changes to consumer spending,” said Cordier.
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