Growing unemployment spells trouble for deeply indebted consumers

Debt

With a reported 20 million credit-active consumers collectively owing R1,45-trillion, the writing is on the wall for many who stand to lose everything they own to creditors and debt collectors.

Neil Roets, CEO of one of South Africa’s largest debt councelling firm, Debt Rescue, said the data published by Stats SA showed that sales of durable goods had slowed down substantially.

“This is a clear indicator of the fact that many consumers have maxed out their credit cards and that lower income earners who live from hand-to-mouth are unable to get further loans from micro lenders and loan sharks.”

He said the fact that the Reserve Bank predicted that unemployment rates would remain high until at least 2025 painted a gloomy picture for consumers.

In a working paper released last week, the Reserve Bank said despite the fact there will be more people working, the unemployment rate would remain high.

The report was written by Senior Treasury Policy Analysts David Faulkner, Christopher Loewald and Konstantin Makrelov. They say that unemployment, poverty and inequality remain fundamental socioeconomic challenges facing South Africa.

Roets said a further indication of how stressed consumers were financially was a survey, published by the Bureau for Economic Research and First National Bank, that showed that consumer confidence had declined to a nine-year low.

Low interest rates had tempted many consumers to take on additional debt which in many cases they could not really afford, he said. “The National Credit Act contains clear guidelines for credit grantors to ensure that consumers applying for credit must be able to repay their debts.

We know from extensive experience in the debt counselling field that many retailers and micro lenders do not adhere to the strict letter of the law and grant credit even through consumers are already over indebted.

“Here the Act is very much on the side of the consumer. If they can prove that credit was extended recklessly, a court can declare such loans null and void,” Roets said.

However, the ever increasing cost of living and low interest rates led to more consumers borrowing money. According to the National Credit Regulator, South African consumers owe R1,45-trillion in the form of mortgages, vehicle finance, credit cards, store cards, personal loans, short-term loans, pension-backed loans.

What further complicates the debt problem is that out of an estimated population of some 50 million, only 13,62 million adults were employed in the first quarter of the year. The unemployment rate edged up to 25,2% in the first quarter, which does not bode well for consumer wealth and increases people’s dependency on borrowed money.

The Reserve Bank’s quarterly bulletin shows that household debt stood at 75,4% of households’ disposable income in the first quarter. Debt-service costs, or the interest paid on housing and personal debt, amounted to 7,7% of the disposable income of households.

“Although the Reserve Bank and Treasury still insist that unsecured lending is far from crisis levels, we are concerned about the rising level of unsecured debt among consumers. For us the proof that consumers are in trouble is the exponential growth in the number of over indebted consumers walking through our doors seeking help in the form of debt counselling,” Roets said.

According to the National Credit Regulator, unsecured credit accounted for 11,34%, or R164,61-billion, of outstanding debt. Roets said different categories of consumers experienced the credit crunch differently.

“Upmarket families where both husband and wife hold down good jobs are relatively untouched by the situation. Although we are seeing out fair share of formerly well-heeled consumers seeking help, it is the lower income earners that are experiencing the full impact of over indebtedness,” Roets said.

Maarten Ackerman, investment strategist at Citadel, was quoted by the Sunday Times as saying that it was relatively easy to obtain credit but that lower and middle income earners were having a tough time.

“It is easy credit and people are willing to borrow. But because it is unsecured, there is scope for trouble when the economy starts to struggle,” said Ackerman.

Roets said a major problem in South Africa was that there was no tradition of saving for a rainy day. “Consumers spend every cent they earn and on top of that they take on an additional debt to pay for those goods and services that they cannot afford to pay for as part of their disposable income. Inevitably it comes back to haunt them and that is the point where they have to seek protection from their creditors through debt counselling.”

– Nampa-Sapa