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Are South Africans living well beyond their means?

18 April 2016 Myra Knoesen
Myra Knoesen, FAnews Journalist

Myra Knoesen, FAnews Journalist

South Africa’s debt to GDP ratio has been growing for some time because of overspending. Consumers have been running up debt and plundering into retirement savings. With that being said, we are aware that savings in SA has been declining for years. Consumers face financial vulnerability because of too much debt, spending too much and bad financial planning.

Junk status inevitable

According to Rowan Burger, Managing Executive of Strategy and Market Development at MMI Corporate & Public Sector, there is a gap in financial literacy and it is important to understand where the problems are, to fix these and provide solutions. He said most South Africans will remain financially illiterate so we need to simplify things. “If we can find the touch points, we can start to move on to a more financially literate society.” 

As revealed by the MMI Unisa Consumer Financial Vulnerability Index (CFVI) South African consumers are on the brink of the equivalent of junk bond status in terms of their financial vulnerability. 

The index is a powerful window into the psyche of consumers and how vulnerable they are feeling in relation to their income, expenditure, savings and debt servicing. With this insight into the South African consumer, the financial services sector is able to use this as a tool to understand client needs and design and develop the most appropriate solutions to enhance financial wellness. 

For instance, the South African Reserve Bank already includes the CFVI in their measurement of financial stability of consumers by gaining a better understanding of the impact of interest rate decisions on specific consumers as well as having access to an overall measure of financial stability in the country. 

A powerful tool

The real concern from the 2015 CFVI lies in the debt servicing numbers which have remained in the Very Exposed band for two years and are now at 48.7, the lowest since the introduction of the CFVI in 2009. 

The index shows that by the end of 2015, local consumers in general remained alarmingly close to the Very Exposed classification. The overall index for Q4 2015 sits at 50.9 index points which is on the lower end of the Mildly Exposed band. 

Analysts at MMI believe that the likelihood of the overall CFVI index slipping into the Very Exposed category during most of the quarters of 2016 is very high given the gloomy growth and unemployment environment, and the inflationary pressures on consumer spending. 

The long-term trend with regards to higher debt servicing vulnerability is of serious concern. While income, expenditure and savings vulnerability are mainly driven by macro-economic performance, debt servicing capabilities are also impacted by institutional dynamics and consumer practices, such as low levels of financial literacy and debt spirals in which millions of consumers find themselves. The increasing interest rate environment adds additional pressure to the finances of those consumers with debt. 

Consumers remain highly indebted and growth in real disposable income is likely to be suppressed by the rise in food prices, electricity tariff hikes and possible increases in petrol prices due to a weak exchange rate.

The cascade path, according to the index, remains under pressure and will in all likelihood remain that way for the remainder of 2016 with little hope that the economy and consumer finances will show a marked improvement during 2017.

Mrs Jacolize Meiring, Department of Taxation at Unisa, said a lot of consumers are living off debt. “It is not an option to remove debt but rather to handle it responsibly.” 

The good news is the situation can be improved through effective planning and sound management. The Q4 2015 CFVI showed respondents listing ‘bad planning’ as the primary cause of their financial vulnerability. 

Sound financial planning

FAnews spoke to Kobus Kleyn, a Certified Financial Planner, about the CFVI results, what this means for financial planners and what opportunities or challenges lay ahead.

“The CFVI should be of grave concern to us as advisers as it means we are not doing enough to ensure the consumers vulnerability is reduced through ongoing financial- and debt planning which is of crucial nature. This leaves us with huge opportunity to enhance planning through awareness. We must drive to ensure consumers do not live beyond their means,” said Kleyn.

“I have no doubt if awareness is driven around the CFVI that consumers will seek advice. However, with the increasing debt to income ration, affordability could be problematic and we need to be willing to do some pro-bono work initially to build long-term relationships and free the consumer from debt,” he continued.

“The responsibility lies at the door of all stakeholders including the FSB, FPI, FSP’s and Financial Media, but mostly, it starts with us as financial professionals,” concluded Kleyn.

Editor’s Thoughts
Consumers face a ton of debt, some necessary and some unnecessary, but it’s never too late to make changes. Financial planners have a key role to play in the future of the country and creating a saving culture but is it easier said than done? What more can financial planners do to make the process of promoting a savings culture a reality?Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za

Comments

Added by Lucille, 21 Apr 2016
How can anybody just assume that South Africans are living beyond their means if only government employees get 15% salary increases but the private sector gets a measly 4% or 5%, if they are lucky!!! Who decides anyway on my behalf that inflation is 6% or whatever percentage!! Everybody's inflation rate differs. And with the Nene debacle it actually soared, am I to be blamed for overspending, if my home loan has been granted by the financial institution at the rate of maybe 5% and now I have to dig up 11% or maybe even more. Somebody else is deciding what we mortals have to pay up while we are dwelling mother earth: Stortkop and his cronies.
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Added by Piet, 19 Apr 2016
Dink die mense by die FSB dat ons as adviseurs "pro bono" gaan en kan werk om mense aan te spoor om te spaar as alle inisiatief weggeneem word met die nuwe RDR reels wat enige kommissie tov. spaar produkte wegneem?

Ek dink met die feitlik totale ontsparing van Suid Afrikaners, die instelling van RDR die probleem net gaan vererger.
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