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Further economic instability increases consumer vulnerability

20 November 2017Momentum, Unisa

South African consumers are finding it increasingly difficult to earn a sufficient income, buy food, pay the bills, save some money and repay debt. This is evident from the latest Momentum/Unisa Consumer Financial Vulnerability Index (CFVI), which shows that an already tough situation worsened even further in the third quarter of 2017 (Q3 2017).

What’s more, all four sub-components of the CFVI, namely income, expenditure, saving and debt servicing worsened for a second quarter in a row. This means that consumers are feeling financial pressures emanating from all over - and not from just one or two of the sub-components (See table 1).

Table 1: overview of CFVI and its sub-components (quarterly)

When the consumer space is tough, it normally manifests itself in a negative and vicious economic cycle. For instance, when consumers become more financially vulnerable, personal income tax receipts will be under pressure, which in turn will increase the fiscal deficit.

This will put pressure on the rand exchange rate to depreciate, which will fuel consumer price inflation and further increase consumers’ financial vulnerability. The above situation is currently at play in South Africa. A higher tax burden on individuals (announced in the February 2017 budget) contributed to a sharp deterioration in the CFVI in Q2 and Q3 2017.

The Medium-Term Budget Speech given last month by Finance Minister Malusi Gigaba, showed lower than estimated personal income tax receipts, which increased the fiscal deficit and contributed to a sharp weakening in the rand exchange rate against a number of currencies. Should the rand maintain these weaker levels, it should manifest itself in higher consumer price inflation and pressure on consumer finances.

Pressure on consumer finances, however, also indicates that company profits will be under pressure. This means lower shareholder value and household wealth, less than expected company tax receipts for the government, an increasing probability of worker retrenchments and a higher unemployment rate. These consequences will, in turn, increase consumers’ financial vulnerability.

To reduce consumer financial vulnerability will require innovative and well thought through solutions. Increasing taxes to reduce the fiscal deficit will contribute to more consumer financial vulnerability rather than reducing it.

A better solution will be to cut government expenditure to affordable levels, given the current paltry state of the economy. And retrenching workers to improve profits will also not be a sustainable solution. The more sustainable solution for most companies would be to assist workers to alleviate financial stress and improve their productivity.

Political uncertainties negatively impacted business confidence and their propensity to invest and spur economic growth, employment and an improved consumer space. The implication of this is that heightened levels of consumer financial vulnerability are expected during the short-to medium-term.

The macroeconomic, microeconomic, political and other conversion factors that continue to impact their lives are not at all facilitative towards escaping financial vulnerability.

Shelley van der Westhuizen, Head of Business Financial Wellness at Momentum Corporate said, “With so much outside of the control of the consumer or employer, perhaps we’ve reached a point in our economy’s history where people are ready to take back their economic power and use all the tools that they have at their disposal to increase their Financial Wellness. Preparing a budget and recording your expenses against that budget and making needed behavioural adjustments are things that increase Financial Wellness, regardless of circumstances. In this way, the ability to reduce our financial vulnerability is within the grasp of each South African consumer”.

Doing the right things (such as having a budget and financial plan) can reduce consumer financial vulnerability and improve Financial Wellness, even in an increasingly tough political and economic environment.

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