You’ll have to tighten your belt to survive 2016

The weak economy, low rates of saving and high levels of debt are causing consumers to feel increasingly financially vulnerable. Bruce Cameron reports HOW THE INDEX IS COMPILED

Consumers must cut their spending and reduce their debt if they are to survive what is likely to be a very tough year – and things could get worse if South Africa’s sovereign (government) debt is downgraded to non- investment- grade, or “junk”, status by major international credit rating agencies, financial services company MMI warns.

Mike Schüssler, of economic consultancy Economists. co. za, says that, without a rating downgrade, interest rates can be expected to rise by one percentage point – on top of the 0.25- percentage- point rise announced this week – over the short term. If South Africa’s debt is downgraded to junk, rates could rise by between two and four percentage points.

Consumers are feeling despondent about their finances, according to the MMI Unisa Consumer Financial Vulnerability Index, which was launched this week.

Schüssler, who was speaking at the launch of the index, says the rating by Standard & Poor’s (S&P) will be the most significant one, because major institutional investors, such as retirement funds, follow its ratings when deciding how to invest their money around the world.

If S&P downgrades South Africa to junk, it is expected that more money will flow out of the country, exacerbating the situation where South Africa spends between four and five percent more offshore than it earns. This will affect inflation and interest rates, making life extremely tough for consumers.

Rowan Burger, the managing executive: strategy and market development at MMI Corporate and Public Sector, the division of MMI Holdings that services large and The MMI Unisa Consumer Financial Vulnerability Index measures four consumer perceptions and classifies them into three main categories, each divided into two sub-categories.

Jacolize Meiring, a senior lecturer and researcher in the department of taxation at Unisa, says the following factors should be taken into consideration when assessing consumers’ financial vulnerability, to form a holistic view of how they perceive their financial position:

◆ Income vulnerability, which is influenced by job security, income growth, government social grants, and the ability to obtain financial assistance from family and friends;

◆ Savings vulnerability, which measures the savings and assets consumers can access;

◆ Expenditure vulnerability, which measures whether consumers can deal with the rising cost of food and transport and are living within their means; and

◆ Debt service vulnerability, which measures the cost of servicing debt and the level of debt accumulated.

The index classifies the results of these components into three categories based on a score out of 100 (the best outcome), namely:

◆ Financially secure. These medium businesses, says the tough conditions are being driven by:

◆ High levels of debt relative to after-tax income. He says millions of consumers are caught in a downward spiral of over-indebtedness.

◆ Low rates of saving. consumers have their cash flow under control and there is little threat of financial vulnerability. They are reducing their debt or have no debt, are building up their savings, and are not spending more than they earn. Consumers in this category are divided into “extremely secure” (those with a score of 80 to 100) or “very secure” (those with a score of 60 to 79.9).

◆ Financially exposed. Consumers’ cash flow is such that they are at high risk of becoming financially vulnerable or insecure. They are teetering on the edge of not being able to repay their debts, save as much as they should, or keep their spending below their income. Consumers with a score of 50 to 50.9 are classified as “mildly exposed”, while those with a score of 40 to 40.9 are classified as “very exposed”.

◆ Financially vulnerable. Consumers’ cash flow is such that they are, or feel they are, financially insecure and unable to cope. They are spending more than they earn, their debt is probably growing and they are saving nothing or very little. Consumers with a score 20 to 39.9 are “very vulnerable”, while those with a score of 0 to 19.9 are “extremely vulnerable”. ◆ Unforeseen expenses. ◆ Increasing interest rates pushing debt levels even higher and reducing savings.

◆ Low levels of financial literacy, making it difficult for consumers to constrain spending, reduce debt and