Tough economy leaves struggling and wealthy South Africans spiralling into debt

An increase in middle-income and wealthy South Africans defaulting on home and vehicle loans indicates the country's poor credit health.

This is according to the Eighty20/XDS Credit Stress Report for the first quarter of 2023, which looks at the impact of economic forces on South African consumers, with particular focus on their credit behaviour.

The report unpacks the credit behaviour of four consumer segments that make up 78% of all credit-active South Africans and 92% of all loan value.

These segments include:

• 'Mothers of the Nation' — low-income, female grant recipients, mainly unemployed or underemployed;
• the 'Mass Credit Market' — employed, lower middle-class, mostly female segment, about 36 years old and with an average personal income of just more than R5,000 per month;
• the 'Middle Class Workers' — their average age is 40 with a personal income of about R15,000 per month;
• and the 'Heavy Hitters', the wealthiest segment.

“[The Heavy Hitters] is the wealthiest 5% of the population, more assets than any other segment, mostly male, high internet penetration and lots of shopping. Two thirds of this segment is made up of families, with the average age 44, and average personal incomes of R42,000 per month. This is the most diverse group in terms of income, with some only barely earning above middle-class incomes while those at the top of the segment are earning multimillion-rand salaries.”

The report states loans newly in default (the proportion of current loan balances that went into default during the quarter) was up by 17.4% over the same quarter last year.

“This change in rate of new defaults (CRND) is an early warning sign for the state of credit in the country and has been in double digits for the last two quarters.

“The CRND increase is driven particularly by new defaults in secured products (home loan at 27% and vehicle asset finance at 12%). A clear sign that even the wealthiest customer segments — Middle Class Workers and Heavy Hitters — are also feeling the pain of South Africa’s economic woes,” the report says.

Home loans, the report shows, are hurting consumers with a steep 27% year-on-year increase in average mortgage instalments due largely to rising interest rates.

The 50-basis point interest rate hikes in March and May have brought the prime lending rate to 11.75%, the highest it has been since 2009.

These rate hikes have increased instalments by R4,600 a month for a R1.5m loan taken out mid-2021.

The report shows that nearly 99% of home loan balances are held by the Heavy Hitters (76%) and Middle Class Workers (17%).

“The home loan book for Middle Class Workers (by value and holders) has been in decline since 2021 quarter four, with the total home loan book across all customers only growing 9.7% over that period.

“Quarter four saw Heavy Hitters experiencing a 24% increase in home loan balances going into default year on year, while quarter one in 2023 has seen that figure increase further to 34%, painting a depressing picture for the retail property market where economic challenges and rising interest rates are depressing growth.”

For the Heavy Hitters and Middle Class, vehicle asset finance shows a similar pattern.

“The rate of new defaults on vehicle asset finance for Heavy Hitters and the Middle Class has increased consistently since mid-2022, while the number of people with this type of loan has been dropping since the end of 2021.”

The reports says there is a real concern about how these customers will be able to continue paying vehicle asset finance and home loans.

Heavy Hitters now have a 60% instalment to income ratio. For all credit-active South Africans this ratio is at 44%.”

The report also states that total credit card debt for the Middle Class continues to rise, and is up 7% over the year, with average credit-card loan balances up 8%, to more than R31,000.

The credit stress amid a tough economic climate gives us a dim view of the future, when the wealthiest segment feels the pinch it’s a clear depiction of financial stress.

—  Andrew Fulton, Eighty20's director

Average credit card overdue balances as a percentage of total balances for the Middle Class is now at 19% compared with 8% for Heavy Hitters.

The latest unemployment figures showed that domestic workers — who fall in the Mothers of the Nation segment — have fared particularly poorly since Covid-19 with about 200,000 fewer jobs than a few years ago.

The report states this “could be an outcome of the financial pressure the Heavy Hitters and Middle Class are facing, causing them to rethink domestic help”.

Another reflection of the high unemployment rate is the thousands of people who flocked to government's Job Fair campaign in Johannesburg, which launched last week and will run until July.

The Gauteng provincial government launched the recruitment drive to address unemployment and promote access to job opportunities within the province.

Thousands of professional jobs are on offer, from drivers, to receptionists, cleaners, artisans, construction managers, communications officers, health practitioners, agricultural advisers, engineers, chief financial officers and others.

The provincial government said it initially intended to advertise more than 15,000 vacant positions, but the number was revised “due to capacity and budgetary constraints”.

“This comprehensive recruitment drive will not only address unemployment challenges but also bolster the capacity of the state, resulting in improved service delivery at various touchpoints,” said Panyaza Lesufi, Gauteng premier.

Turning back to the report, it shows that two low-income segments, Mothers of the Nation and Hustling Males, are mainly unemployed or underemployed, with the majority receiving government grants.

The Hustling Male segment, has an average age of 33, low income, very little credit and high unemployment.

“Though they grew up on the promise of the new SA, this has not been realised due to poor schooling, skills or training. The average income of these 6-million men is less than R1,000 per month due to nearly 60% unemployment and heavy reliance on grants and household income.”

The report states the relevance of these segments in terms of credit volume is negligible, with only 10% of the combined 13-million people holding any form of credit, and the total value of their loans is about a tenth of a percent of South Africa’s loan book.

“But for the Mothers of the Nation, their stress is significant. Some 96% of the value of loans for this segment is made up of retail and unsecured loans ...”

Andrew Fulton, Eighty20's director, said: “The credit stress amid a tough economic climate gives us a dim view of the future, when the wealthiest segment feels the pinch it’s a clear depiction of financial stress. With this in mind, it’s even more crucial that the middle to lower income segments will need to be frugal with their finances to work smarter with their access to credit.”