SA household sector credit outlook

08 Feb 2013

For most people, when the Reserve Bank (SARB) leaves interest rates unchanged, the decision appears fairly insignificant.

Since 2009, we have seen major improvements in debt re-payment performances by the household sector, as the debt-service ratio (the cost of servicing debt, interest+capital estimate, expressed as a percentage of disposable income) has declined.

Sometimes this is the case, but that depends on how the borrowing/lending situation is changing, because rising indebtedness means higher debt servicing costs should the SARB merely do nothing.

At present, I believe this to be the case. Last year, we saw average consumer price inflation (CPI) creeping up a little further.

In 2010 the average CPI inflation rate bottomed at 4.3 percent, before rising to 5 percent for 2011 and then further to 5.6 percent for 2012.

As at December 2012, its year-on-year (y/y) rate was 5.7 percent, teetering on the edge of the SARB’s upper inflation target limit of 6 percent

In addition, in her statement the Governor warned of “upside risk” to inflation forecasts, and a possible temporary breaching of the target limit this year.

For some time now, she has also warned specifically against “home grown” inflationary pressure in the form of high wage demands.

Therefore, unless the bottom falls out of the global economy, this would seem to limit the probability of any further interest rate reduction.

As such, we are of the belief that the SARB will most likely keep interest rates on hold through 2013 and the first half of 2014, where-after some mild increase is expected.

This is a fairly benign scenario, with probably still a lengthy period of sideways movement in rates, as one would expect in a time where the global and local economy are faring poorly.

But putting it together with other forecasts related to household sector credit and income growth, a flat interest rates scenario until next year could mean that effectively the SARB will be allowing household sector debt-servicing costs relative to disposable income to rise gradually.

This in turn is expected to see the end of household debt servicing performance improvements in 2013.

Since 2009, we have seen major improvements in debt re-payment performances by the household sector, as the debt-service ratio (the cost of servicing debt, interest+capital estimate, expressed as a percentage of disposable income) has declined.

Sharp interest rate cuts from late-2008 were the main contributor to this improvement, but to a lesser extent some decline in the household debt-to-disposable income ratio from an all-time high of 82.7 percent as at early-2008 also helped.

The debt-service ratio is a fairly good predictor of household sector debt servicing performance.

Sharp interest rate cuts from late-2008 were the main contributor to this improvement, but to a lesser extent some decline in the household debt-to-disposable income ratio from an all-time high of 82.7 percent as at early-2008 also helped. 

Not surprising, the pain of rising interest rates from 2006 to 2008 caused lenders and borrowers alike to go more lightly on lending/borrowing and household sector credit growth slowed all the way from a 28.2 percent peak in February 2006 to 2.6 percent by November 2009.

This slower credit growth, accompanied by improved economic and household disposable income growth, allowed some moderate decline in the debt-to-disposable income ratio from 82.7 percent at the beginning of 2008, to 75.2 percent by end-2011.

However, last year the debt-to-disposable income ratio started to rise, slightly raising the debt service ratio early in the year.

The SARB, however, countered this impact of a rising debt-to-disposable income ratio with a further interest rate cut in the 3rd quarter, and the indicators of debt servicing performance continued to improve, albeit at a slowing rate.

The question now is, will the debt-to-disposable income ratio continue to rise, taking the debt-service ratio higher in the expected absence of further interest rate reduction?

And will this in turn lead to the end of the improvement in household sector debt servicing performance? I believe, yes.

Already, in line with a no-longer declining debt-service ratio, we have seen the y/y rates of decline in both civil judgements in individual debt and insolvencies tapering off.

No noticeable deterioration yet in 2012, therefore, but a definite slowing pace of improvement.

Crucial to continuing the improvement past 2013, in the absence of rate cuts, would be further reduction in the debt-to-disposable income ratio.

Fortunately, mortgage credit is the “big one”, and with growth rates generally between 1 and 2 percent it is the only thing keeping something of a lid on overall, household credit growth. 

To this effect, some may be heartened by a slightly slower monthly household credit growth figure for December, released yesterday.

From 10.4 percent y/y growth in November, total household sector credit outstanding slowed to 9.9 percent in December.

However, this is not convincing, and a closer look at the numbers reveals a higher base effect in December’s y/y number, created by a “mini-spike” in growth in December a year ago.

I am not convinced that the slight decline in y/y growth in December 2012 is the start of a slowing trend, and would expect acceleration to resume in January’s numbers.

In recent times, household sector credit has been a key talking point, and more specifically the “unsecured lending” component thereof.

The issue is perhaps a little more widespread than merely the unsecured components thereof, with the instalment sales credit component also growing at double-digit rates, and vehicle finance is a key part of this component.

Therefore, strong growth has been experienced in recent times in all major areas of household credit except mortgage credit. Total non-mortgage household credit extended by the banking sector was growing by 25 percent as at November.

Fortunately, mortgage credit is the “big one”, and with growth rates generally between 1 and 2 percent it is the only thing keeping something of a lid on overall, household credit growth. 

While I don’t believe that the peak in household sector credit growth has yet been reached, it is conceivable that recent “verbal intervention” by National Treasury, where it posed serious questions to banks regarding the wisdom of strong unsecured lending growth, may have some impact in terms of throttling back credit growth momentum, so the broad acceleration in household sector credit is not expected to go too much higher this year.

Therefore, I expect credit growth to peak at around 11.7 percent y/y in Q1 2014.

While not extreme by boom time rates of growth, the catch is that a currently mediocre economy is expected to lead to single digit nominal household sector disposable income growth.

Various “post-recession” normalisations off very low bases have been boosting household disposable income growth to very strong levels in recent years, levels where real disposable income growth well-exceeded GDP growth, especially in 2010 and 2011.

These normalisations include a recovery in employment after huge job loss, above inflation wage increases following the CPI inflation surge of 2008, and sharp growth in discretionary remuneration and household investment incomes as company results improved.

But the abovementioned “normalisations” are believed to be by-and-large over, and from here onward it should be slower nominal disposable income growth at rates where growth in real terms declines to be more or less in line with moderate expected economic growth.

Already through the first three quarters of 2012 we saw disposable income growth tapering, and the average nominal disposable income growth for 2013 is forecast at 8.4 percent, slower than the estimated 9.2 percent for last year.

This is a few percentage points below expected household credit growth, implying a gradual rise in the debt-to-disposable income ratio to a year-end 78.5 percent, and an end-2014 79.6 percent.

 In the absence of expected interest rate cuts, and the forecast start of rate hiking later in 2014, this would translate into a gradual rise in the debt-service ratio from the third quarter 2012 level of 11.4 percent to an end-2014 level of 12.4 percent.

This scenario would not be extreme, compared to the extreme 16.3 percent debt-service ratio peak in 2008.

But much would rely on very moderate SARB behaviour on the interest rate front, and this end-2014 forecast is based on an interest rate forecast of prime only rising as far as 9.5 percent by that stage, and only rising further later.

So do sideways movements in interest rates mean anything? If the household sector debt-to-disposable income ratio is rising then, yes, this implies rising debt service costs despite the SARB doing nothing.

This is what is expected to happen gradually in the next two years, which in turn could see the end of the improving trend in debt-servicing performance since a few years ago.

A look at whether interest rates in South Africa are not perhaps just a little too stable  is helpful going forward, read the article here.John Loos

Email Print Share

Similar Articles

View all articles

Top Articles

View all articles
Top Articles
More property articles...

Newsletter

Get the latest property news in your inbox.
Select your options:

Your browser is out of date!

It looks like you are using an outdated version of Internet Explorer.

If you are using Internet Explorer 8 or higher, please verify that your Internet Explorer compatibility view settings are not enabled.

For the best browsing experience update to the latest Version of Internet Explorer or try out Google Chrome or Mozilla Firefox.


Please contact our Customer Service Centre for further assistance. Tel. +27 (0)861 111 724