Interest rates have a chokehold on SA households — index
SA households remain under severe financial pressure with personal credit facilities stretched to the limit, mainly as a result of the most restrictive monetary policy stance in 14 years, according to the Altron Fintech Household Resilience Index (AFHRI).
Published on Thursday, the index shows that while households’ financial position marginally improved to 109.9 in the third quarter of 2023 compared to 109.1 in the second quarter, households are currently worse off than they were in 2019, before the Covid-19 pandemic.
The AFHRI gauges the financial resilience of households and provides clarity on the financial disposition of households and their ability to cope with debt. It comprises 20 different indicators, all of which are directly or indirectly related to sources of income or asset values.
Speaking to Business Day, economist Roelof Botha, who compiles the index on behalf of Altron Fintech, said the index shows that the financial position of households is 1.2% worse than it was in 2019 — an indication that interest rates are the singular factor keeping the economy and households in a chokehold.
“We have seen a good recovery in export commodities, lower international oil prices, a massive investment in renewable energy, but the big issue are interest rates,” Botha said.
“There has been an increase in credit impairments by the banking sector. The ratio between household disposable income and household debt costs has been the worst-performing indicator included in our index. Everything boils down to interest rates.”
He added that over the past two years, the country’s benchmark prime lending rate has been raised consistently to almost 12%, the highest level in 14 years. This is despite the fact that the consumer price index is comfortably within the Reserve Bank’s target range for inflation of 3%-6% and there are clear signs that inflationary pressures have receded since the second half of 2023, he said.
Botha told Business Day the AFHRI is weighted according to the demand side of the shortterm lending industry and calculated on a quarterly basis, with the first quarter of 2014 being the base period, equalling an index value of 100. It is a key source of economic analysis providing important benchmarking information to the market.
Botha said the ratio between household disposable income and household debt costs is the worst-performing indicator included in the AFHRI.
“After increasing consistently since 2016, this ratio took a hefty knock in the second quarter of 2020 induced by the Covid-19 lockdowns, but then quickly recovered to a multiyear high,” Botha said.
“The reciprocal of this ratio, the debt costs to income, has risen from a low of 6.7% in the fourth quarter of 2021 to 8.9% in the third quarter of 2023 — an increase of some 33% leaving households worse off.”
He said first-time home buyers have felt it the worst.
Buyers have been particularly hampered by the high interest rates. The average deposit required for a bond for first-time home buyers, as administered by BetterBond, has shot up from 8.2% in 2019 to 14.7% in 2023. He said the average homeowner in SA is paying R4,000 more since the Bank started raising rates.
“There is no demand-inflation in the SA economy. Lower interest rates will almost certainly lead to a new growth trend for the AFHRI, but the lingering effects of higher debt levels and subdued wage growth will be felt during the first half of 2024,” Botha said.
He said since 2014, the average annual improvement in the index is less than 1%, which serves as a clear indication of the economy’s underperformance, mainly because of low investor and business confidence resulting from state capture and the erosion of the efficiency of infrastructure.
“Over the past 18 months, this has been exacerbated by the negative effects of a sharp increase in the cost of credit.”
He added that the year-onyear decline in real household disposable income is a result of the unfortunate combination of relatively high inflation, lower real wages in the private sector, and the increased debt repayment costs forced upon households by the highest interest rates in 14 years.
“Significant growth in employment in both the private and public sectors has provided a welcome buffer to the downward trajectory of the AFHRI. Unfortunately, private sector salaries have not matched the growth in jobs and continue to decline in real terms,” he said.
THE LINGERING EFFECTS OF HIGHER DEBT LEVELS AND SUBDUED WAGE GROWTH WILL BE FELT DURING THE FIRST HALF OF 2024