Household 'balance sheets' strong as ever

South African consumers are racking up debt like there is no tomorrow. This debt is of particular concern to Reserve Bank Governor, Tito Mboweni. Increases in credit extension lead to higher expenditure and inflationary pressures which make it difficult for Mboweni to keep inflation in the targeted three to six percent range.

Rian le Roux, an economist at Old Mutual Investment Group (OMIGSA) feels the large increase in domestic credit is partly offset by improvements in household balance sheets.

A balance sheet is a statement of assets and liabilities at a given point in time. It is most commonly associated with the annual financial statements of larger corporations - but is also applied to personal financial situations. Banks often request statements of assets and liabilities when considering credit applications.

To draw up a household balance sheet we simply consider all the assets and debts 'owned' by the household in question. Assets include the value of the primary residence, stock market investments, unit trusts, cash and any other fixed property with realisable value. Debts include balances on home loans, credit cards, hire purchase agreements and any similar arrangements.

Credit growth is backed by fundamentals

Growth in consumer debt should not be viewed in an entirely negative light. Debt has fuelled a great portion of the retail consumption boom in recent years. Le Roux highlighted some important developments at an OMIGSA presentation held in Johannesburg on 30 January.

The first is that real consumer growth increased by 7% in 2006. Disposable income exceeded household consumption expenditure and is evidence that not all consumer spending is debt based.

The second is that the cost of servicing household debt burdens is not historically high. Much noise has been made about the huge increase in levels of debt as a percentage of disposable income - but little has been said about the smaller cost of servicing the interest payments on this debt. The situation will change if we see more interest rates hikes in 2007.

And finally, household debt as a percentage of assets is reducing. The value of assets held by households has increased at a greater rate than the value of debt. This trend is largely due to the huge surge in property values seen in South Africa since 2001. Household balance sheets are in very good condition at present.

Consumers still hungry for debt

Consumers remain hungry for debt - and it appears they will allow nothing to stand in their way. New vehicle sales surged again in January 2007 despite the 200 basis point hike in interest rates last year. Regulatory interventions in the form of the National Credit Act seem to have little impact.

The financial services sector remains happy to pander to consumer demand for credit. New and innovative credit products are springing up all the time. Nowadays unsolicited offers for short-term loans or store credit cards land in the mailbox on a regular basis. In many cases, the balances on these 'loans' are unsecured.

ABSA's latest offering is widely advertised and hardly makes sense in an environment where consumers should be encouraged to reduce debt. "Get a loan from ABSA and skip one month's repayment" boasts the advert. The product allows you to skip one instalment every year - giving the bank the opportunity to extract more interest over the term of the loan.

Payment holidays should be used as emergency measures to help clients who are struggling financially rather than being built into the product upfront.

Editor's thoughts:
Banks are in the business of borrowing money cheap and lending that money for maximum gain. They are unlikely to sacrifice the high margins available on short-term loan products to dampen credit growth.