Savings take a back seat in the current credit boom

South Africa relies heavily on imports for capital goods and equipment. For too long now, the economy has suffered from a typical Africa malaise, being that we simply export our raw material for offshore manufacture. What pro-active steps should South Afr

The extension of credit to South African citizens continues at a phenomenal rate. Money lent to individuals for household, motor vehicle and retail purchases climbed to a staggering 73.75% of disposable income according to the latest Reserve Bank Quarterly Report.

Over the quarter ending in December 2006, personal saving as a percentage of Gross Domestic Product (GDP) fell to 12.75%. The percentage of GDP saved for the 2006 year averages out at a meagre 14%. These numbers confirm what everyone in South Africa already knows. Spending is deeply entrenched in the psyche of the average local consumer. South Africans live for instant gratification!

The real problem is that this instant gratification is increasingly being attained with tomorrow's money. Consumers are now making use of second mortgages and credit cards to fund things like holidays, cars and other luxury goods. The Quarterly Report outlines the seriousness of the problem by stating: "after allowing for depreciation, the household sectors consumption exceeded its income in 2006, resulting in the first ever net negative saving by the household sector for a full year."

In other words, the average household spent more than it earned in 2006

Something will have to give

Tito Mboweni, governor of the Reserve Bank, has long warned South African consumers about the dangers of credit spending. He is usually quick to act when credit behaviour gets out of hand.

His major weapon in combating consumer spending is to hike interest rates... And given the latest numbers, we think Mboweni will want to use this weapon again in the coming months. The limited impact of the most recent Reserve Bank attempts to curtail spending is cause for concern. During the second part of 2006 consumers were put on the spot as interest rates were hiked by a full 2 percentage points. Yet spending and credit extension have continued to grow.

If consumers continue to spend on credit we could run into problems similar to those faced by US consumers right now. Many of these consumers have taken second or third mortgages on their houses to fund living expenses. Now, faced with a housing crisis in the US, these borrowers are coming under increasing financial pressure. We should remember that the banks who front us all this money can request that we repay the money at any time!

Continued spending hits current account deficit

In another worrying sign for the local economy, the current account deficit rose to R143 billion- or 7.8% of GDP. For those of you who dont understand economic terms the current account operates a bit like a household budget. Every month, the total expenses purchases (in South Africa's case imports) are netted off against the total income (exports) to determine whether the current account balance is in surplus or deficit.

What the number means, is that South Africas expenditure on goods has outstripped the inflows from exports. The high number can be attributed to a large demand for crude oil and capital equipment in the last quarter of 2006. However, given South Africas objective of building new stadium for the 2010 Soccer World Cup, and governments numerous social spending initiatives, it is likely this deficit will remain and even grow in coming periods.

A country is simply the sum of all its citizens. South Africas attitude to debt and spending is slowly coming home to roost. If we continue to spend more than we earn we the current account deficit will grow. And while this is not in itself a bad thing, the situation should be closely monitored to prevent it from spiralling out of control.

Editor's thoughts:
South Africa relies heavily on imports for capital goods and equipment. For too long now, the economy has suffered from a typical Africa malaise, being that we simply export our raw material for offshore manufacture. What pro-active steps should South African industry take to reign in the current account deficit? Send your ideas to gareth@fanews.co.za.