Debt stress levels improving
Local consumers and businesses have a better grip on debt, suggesting that an economic turnaround is imminent.
asurvey of 200 000 South African businesses by global information services company Experian shows debtors days declined from 49.7 in the third quarter of 2016 to 47 days in the final quarter of the year. This is the lowest level in three years and is a small but significant turnaround that suggests businesses have a better grip on their debtors books.
There are other reasons to be optimistic. Household debt as a percentage of disposable income (see graph) has been declining since 2013, which means South Africans are able to pay off debt with greater comfort.
At business level, companies have gone through a period of deleveraging in anticipation of higher interest rates.
The ratio of outstanding debtors days of 90 day-plus to less than 60 days declined sharply, from 11.2 in the previous quarter to 9.3 over the last quarter to December 2016, and is now at the lowest level since 2014. A lower ratio means companies are carrying less longer-term debt.
Data from Experian shows consumers are in somewhat better shape than a few years ago, but remain stressed.
According to fourth quarter data, of the roughly 2.2m vehicle finance accounts in the country, nine out of 10 are up to date. There are about 1.5m mortgage accounts in SA, of which more than 91% are up to date.
Simon Russell, managing director of Experian South Africa, says while it is still early days, there are several indicators suggesting the worst may be behind us.
Experian’s Business Debt Conditions Index (BDI) for the fourth quarter of 2016 reflected a slight improvement to -0.03 from -0.098 in the previous quarter. “Although the latest reading is still in negative territory, the change is still a positive development for the BDI as it suggests we may be approaching the turning point of improved business debt stress conditions in the next quarters,” says Russell.
The BDI is an indicator of the overall health of businesses and their ability to settle their debts. The reasons it remains in negative territory are slow economic growth, lack of change in the ratio between domestic and foreign interest rates, and a slight deterioration in the gap between producer and consumer inflation – suggesting a tighter environment for businesses, in which they struggle to pass on cost increases.
Russell says another factor is at play in the improving business and consumer debt picture: “There is a great shift happening in the way companies interact with their customers. There is a far greater level of analytical detail on customer habits and experience than was the case a few years ago, and this allows companies to better segment their customers and service them accordingly.”
Experian’s predictive indicator, called the Delphi New Business score, assists in gauging whether a new applicant for credit will default on repayments. This draws on multiple databases and sources of information, including court judgment records, debt collections and demographic data, and information from the SA Consumer Credit Risk Association. The average Delphi score for credit-active SA consumers is currently 600, implying a 33% risk of default, versus a score of 620 in 2014, representing a probable default rate of 16%. That’s a worrying development that needs closer monitoring, says Russell. “While we are seeing slight improvements in debt stress levels, we are seeing almost no growth in consumer spending, while companies and individuals are very much in a deleveraging phase,” adds Russell.
At the same time, just half of the store cards in the country are in good standing. In times of economic distress, consumers will default on store credit cards before other forms of debt. The explosion in unsecured lending contributed to the consumer boom of the last decade, but since then banks have tightened up their lending in line with the National Credit Amendment Act affordability guidelines.
“A well-functioning credit market is the mark of a sophisticated economy,” says Russell. “There are aspects of the credit market that deserve far more attention, but overall there are signs of improvement and we need to build on these. Without credit, economic growth would be impaired, though too much debt being issued, as happened in the 2000s, can also impair growth.”