Preparing for round two of the credit crisis
In the past you could assess the wellbeing of the South African consumer by looking at insolvency and liquidation statistics. Nowadays the impact of high debt levels is partly veiled by the protections contained in the National Credit Act (NCA). In the event a consumer enters a debt review, the Act allows a 60-day grace period during which time creditors cannot take legal action. As the world emerges from its credit-linked recession local consumers are facing a credit crisis of their own making. With high levels of debt to disposable income the number of consumers seeking help to manage their debt is growing exponentially.
In December 2009 the National Credit Regulator (NCR) – responsible for regulating and monitoring registered credit bureaus – reported an alarming spike in the level of domestic debt stress. At 30 September 2009 credit bureaus held records for 18.01 million credit active consumers of which only 55.1% were considered in good standing. The organisation says there are 8.09 million consumers with impaired records and approximately 9 000 consumers applying for debt counselling each month. And the situation could get worse as consumers return from their December holidays.
Budget or bust!
Leila Beltramo, manager of Consumer Assist in Cape Town, told Sapa that the group was inundated with enquiries from stressed consumers in the New Year. “People expected bonuses that did not materialise or were far smaller than in previous years, or they did not anticipate the big slice the taxman would take of the bonus,” she said. Families returning from holiday are forced to examine their finances, and often find they are in deeper financial trouble than they imagined. What should these families do? It seems prevention is better than cure. The best strategy is to stay on your creditors’ good side by budgeting, avoiding unnecessary expenditure and meeting financial obligations as they fall due. If it’s too late for this sensible approach then you should seek assistance from a debt counsellor to get your financial affairs in order.
Consumers should not rely on the economy to see them through… Tjaart Kruger, financial director of Consumer Assist, observes: “we are concerned that consumers are taking economists’ predictions that the economy is starting to recover as an excuse to start overspending!” In reality job creation and wages will probably lag the economic recovery by some way. Corporate South Africa is jittery in the wake of the global recession and is reluctant to employ new staff or inflate operating costs by awarding inflation plus wage increases. And that’s why Consumer Assist chief executive, André Snyman, believes “consumer debt will continue to rise over the short to medium term and not begin settling until at least 18 months after a real economic recovery takes place!” Local consumers will have to take special care of their finances until well into 2011.
Avoid borrowing in this climate
As the New Year gets underway the financial press is littered with good news stories. We’ve encountered ‘feel good’ articles about the end of recession, improving house prices and a turnaround in motor vehicle sales. What the press doesn’t dwell on is the long-term consequence of recession-led job losses. It took just six months for the economy to shed most of the jobs created during five years of impressive GDP growth. Consumers have to avoid borrowing in this climate. Paul Slot, director of Octogen (a group of debt counsellors and financial wellbeing specialists) reiterates: “although the recession has technically ended for consumers and businesses in South Africa, this does not mean that all is well. The local economy may have come out of recession but economic conditions will remain tight for some time.”
Interest rates have declined by 500 basis points since June 2008. “The cost of borrowing [prime rate] is now at more reasonable levels, falling off from the high of 15.5% experienced in the second half of 2008,” said Slot. This could be as good as it gets in the short-term. Market commentators don’t expect further rate cuts through 2010. If anything, inflationary pressures could push the new Reserve Bank governor’s hand to hike rates in the second half. Local consumers will be hard-pressed to meet increased costs of electricity and other regulated costs, education and medical aid.
Editor’s thoughts: The middle class is bracing for a difficult 2010. Families will have to find additional cash to cover inflation plus price hikes in regulated goods like electricity, water and municipal rates – and won’t be able to rely on salary increases or bonuses to get by. Have you been able to reduce your debt thanks to lower interest rates, or have savings on your monthly mortgage repayment been sucked up by increases in other monthly expenditures? Add your comments below, or send them to [email protected]
