Trapped in the credit blender

Surveying the press clippings from the last five days it’s difficult to find a story with a positive spin. And much as we’d like to bring you some good news there’s simply not much of it doing the rounds. We’ve got power problems, skills shortages, leader

Liquidations up 23.2% year on year

I-Net Bridge reports that “the total number of liquidations recorded for March 2008 increased by 23.2 percent – from 241 to 297 – compared with March 2007.” The total liquidations in the difficult first quarter of 2008 hit 687 cases, an increase of 12.8%. But the real cause for concern is the surge in compulsory liquidations. Tough economic conditions mean that banks are being forced to take action against clients who cannot meet their bond and instalment payments.

What worries FAnews Online is that there’s no mention of the capital recoveries achieved through these insolvency actions. With the market for residential property and motor vehicles showing early sign of strain it’s not a far stretch to assume that many of these insolvencies result in the banks recovering only fractions of the amounts owed. It’s a situation that will probably get worse as the number of insolvency cases increase.

Banks repossess vehicles by the thousands

Insolvency is probably the most drastic consequence of excessive borrowing. We’re seeing a huge increase in the number of vehicle repossessions too. In last week’s Financial Mail the FM Research team compiled a telling table of vehicle repossessions. Each of the country’s major banks has shown an increase of between 15% and 30% in the number of monthly repossessions compared to last year. First National Bank is repossessing 1 800 cars per month, Standard Bank 640, ABSA 1 250 and Nedbank 450. That’s a total of 4 140 cars a month (or 49 680 cars a year) before we include numbers from WesBank, one of South Africa’s largest credit instalment financiers.

Talking to Business Report, WesBank’s sales and marketing director Chris de Kok said that vehicle repossessions were likely to flatten at current levels. He believes most consumers with little chance of surviving the current economic cycle have already been “washed out of the system.” Still, the company is processing around 1 000 repossessions a month, twice the average of 600 per month in 2007. Again, the concern is that these repossessed vehicles are fetching less money at vehicle auctions due to the current oversupply of second hand vehicles and the slowdown in new and used vehicle sales.

WesBank provides an interesting ‘average’ breakdown of mobility costs. R1 744 (33%) goes to capital repayment, R664 (12%) to interest, R1 143 (21%) to interest, R1 318 (25%) to fuel and R503 (9%) to maintenance. That means an average vehicle costs around R5 732 per month in 2008 – compared with R3 738 in 2004.

And no sign to the end of the interest rate pain

Why this flood of repossessions? The basic reason is that household income has been whittled away by a series of interest rate hikes. Economists say that in real terms mortgage repayments are up 32% over the last 12 to 15 months. With bond repayments, food, transport and medical aid all increasing at a rate faster than inflation the first thing to slip is usually the car repayment.

But there may be worse to come. The latest numbers released by statistics South Africa show that CPIX (inflation with the impact of mortgage interest stripped out) has hit 10.1%. And the producer inflation numbers released on Wednesday were equally disappointing, rising to 11.8% year on year to March 2008. Economists have mostly done an about turn on their previous positions that we’d see an improvement in the inflation outlook in the last quarter of 2008.

The consensus is we’re facing more rate hikes in June, with the ugly prospect of a full percentage point hike rather than the half percent increments we’ve become accustomed to. And the cycle will probably only turn late in 2009. With food going up on a daily basis and another 30cpl hike in fuel expected in May consumers are going to be wondering if they can hold out till then.

Editor’s thoughts:
The prime lending rate is currently at 15% and could be hiked to 15.5% in June. Higher rates have an immediate impact on household disposable income, with each 0.5% increase adding R278 per month to the repayment on a R750 0000 bond. Do you think you can survive at current interest rate levels for the next year? Send your comments to gareth@fanews.co.za, or respond below.