Household finances show slight improvement
The Reserve Bank’s Quarterly Bulletin, September 2008 contains some good news for the country’s indebted consumer. It reveals that despite paying slightly more to service debt the overall level of household debt is on the decline. This trend is supported by evidence from the ground where consumers’ appetite for debt seems vastly reduced. And given this week-end’s Sunday Times report of around 7 000 motor vehicle repossessions each month we’re sure the average citizen will be more careful about taking on unmanageable debt going forward.
There have also been some useful developments where global commodity prices are concerned. Oil prices have subsided from recent highs of above $140 per barrel to around the $100 mark – resulting in a welcome decrease in fuel prices domestically. We’re confident that these price movements will combine with more disciplined domestic consumer behaviour to finally make a dent in the inflation situation.
Consumption expenditure on the decline
The raft of measures implemented by the Reserve Bank to tame inflation is showing some signs of taking hold. According to the bank, “growth in real final consumption expenditure by households lost further momentum in the second quarter of 2008…” Consumers are spending less on durable goods – with demand for “semi-durable and non-durable goods and services” also on the decline. Why the slowdown?
Consumers have been forced to adjust their spending habits to accommodate the bank’s repeated interest rate hikes! Higher interest rates result in higher debt-servicing costs, lower levels of disposable income and a slowdown in demand. And that should put a brake on inflation. The problem with this strategy is that South Africa is not only affected by domestic consumer behaviour. As part of the global economy we are unable to escape the inflationary pressures caused by rising food and energy prices. We’ve also had to contend with extraordinary domestic price pressures caused by Eskom and changes to municipal rates and services. So although the Reserve Bank held back on an interest rate hike in August they’re still concerned about rising prices: “Of concern was not only that CPIX inflation rose further above the inflation-target range, but also that indicators of second-round inflationary forces, such as wage settlements and the rate of increase in CPIX excluding food and petrol, continued to accelerate while significant increases in electricity prices were also in the pipeline.”
Ironically the Quarterly Bulletin coincided with major increases to the salaries of Reserve Bank governor Tito Mboweni and his deputies, Xolile Guma and Renosi Mokate. Mboweni’s annual package will jump by 27% from R2.9m to R3.8m per annum while his deputy governors both receive hikes in excess of 50%. Not bad when you consider the average 7% wage increase recorded across all segments of the economy in the latest financial year.
Indebtedness might have reached a peak
Other good news for consumers is that the ratio of household debt to disposable income improved slightly. It recovered to 76.7% from 78.2% Q1 2008. This was the first time in four years that the ratio declined slightly. A quick look at the performance of various sectors in the domestic economy will show why… Major contributors to household debt are mortgage repayments and motor vehicle finance arrangements. Both industries are showing severe signs of strain – with house prices declining in real terms and motor vehicle sales down 30% year-on-year to August. Mortgage bonds extended in the second quarter of 2008 were 31.5% down on the same period in the previous year.
Although the cost of servicing this debt rose slightly (from 11.3% to 11.6% of disposable income) economists expect this situation to improve from the fourth quarter of this year. Jacques du Toit, analyst at Absa told Business Report: “It is definitely encouraging and an indication that the Reserve Bank’s tight monetary policy since 2006 has now worked through to the household sector.”
Editor’s thoughts:
Reserve Bank governor Tito Mboweni has been extremely vocal about keeping inflationary pressures in the domestic economy under control. Last year he was at great pains to keep his salary hike within the Reserve Bank’s official inflation range. But things have changed this year. What message does his 27% pay hike send to the rest of the country? Add you comment below, or send it to [email protected]
