A debt-free South Africa – a pipe dream or reality?

21 June 2018Nigel Willmott, Momentum Consult
Nigel Willmott CFP®, Principal at Momentum Consult.

Nigel Willmott CFP®, Principal at Momentum Consult.

A tough question. Before we can determine a clear answer, we need to understand what drives debt amongst consumers in South Africa. I will look at certain aspects and attempt to thread a narrative. It isn’t a straight forward “yes” or “no” as I will describe.

Socio-economic considerations

It is a fact that South Africa has one of the highest economic inequality gaps in the world. This has not been curbed in recent times and continues to widen. There is a small wealthy elite, not much of a solid, stable middle class to speak of [which in turn is under strain and already debt burdened for various reasons] and a very large, growing, unemployed, disgruntled and financially vulnerable population.

Unemployment on the rise

Unemployment continues to rise on the back of a stagnant economy. The 18 – 35-year-old segment finds themselves out of employment permanently or underemployed. Roughly one in two are out of work or underemployed. This means that the generation of South Africans are out of work, little or no job or career prospects and little hope of uplifting themselves out of poverty.

Stagnant economy

Lack of jobs, unemployment, underemployment, company closures and retrenchment mean that many South Africans find themselves out of work. Jobs are scarce. Permanent jobs are rare. Jobs might be part time or short-term contract at best. Many South Africans have very little “emergency money” to fall back on so once they find themselves unemployed they often turn to lending as a form of “income”. If their predicament is prolonged so to does the lending cycle.

Sandwich generation

The middle age segment [35 – 55-year-olds] finds themselves for various reasons in a situation where they are not only responsible for themselves but also for their adult children who cannot find work and their parents who made little or no retirement planning provision. This segment may also find themselves retrenched and out of work due to the stagnant economy.

Single parent households or only one spouse working while the other is long-term unemployed adds to the dire predicament. The stresses on this segment will mean that they too have become financially vulnerable and will not be able to make provision for their retirement provision in turn.

Consumption based society

South Africans at every turn are encouraged to buy and spend. From cell phones to clothes, entertainment and leisure to cars and lifestyle to mention a few. Fuelling this splurge is access to easy credit and lending. People are encouraged to spend and lend more that than they are encouraged [and willing to] save and invest. Many South Africans have become a victim of instant gratification and no consideration for deferred gratification and planning for tomorrow.

Granted, many South Africans are in a tight bind for reasons out of their immediate control but many South Africans find themselves in a financial bind of their own choosing – poor financial behaviour, more focus on wants and not needs, wrong choices and skewed priorities. People are encouraged to “live the life today” and if you don’t have enough money then don’t stress there is a credit and lending solution for just about every purchase you can imagine.

Tighter regulations and stricter guidelines around lending will be needed to ensure that lending is utilised in the appropriate manner for appropriate things and in the right instances. Consumption driven lending will not be a long term sustainable phenomenon. Lending to assist in economic upliftment will be helpful and will have a positive knock on effect.

Young Adults and Millennials

Many young adults are finding it hard to establish themselves. Most young adults are studying full time well into their twenties. Some might be fortunate to have student funding from government but for many they either have to turn to a loan or their parents have to pay for their tuition [often then to the detriment of the parent].

Then, having a degree does not guarantee work. The qualified student now finds themselves unemployed or underemployed. This means no income to the student, possibly a hefty student loan to service, strain on their parents as young adults are living at home longer and a general lack of ability to “move on”. This means that young adults find it hard to find [affordable] accommodation of their own, a vehicle for personal transport and so on.

Financial education and financial coaching

Throughout junior and high school children and are not taught effective life and money skills. By the time the child is a young adult many don’t have an effective financial compass. Good role models are hard to come by and children learn the wrong habits from early on. Children are targeted the most by commerce and encouraged to want and buy. They grow up with this and if left unchecked we repeat the same vicious cycle that has firmly taken hold.

There needs to be a concerted, sustainable financial education campaign implemented into the school curriculum to ensure and work towards better outcomes. This should permeate through into corporates as well where companies are encouraged and incentivised to promote financial capability amongst the workforce. A more financially secure workforce means better profits for business. Theft, fraud, corruption, violent strike action, absenteeism and presenteeism all stem from financial unwellness in the workplace.

So, could we see a debt free South African society? Remember, there is good debt and bad debt. Good debt that can drive upliftment and economic activity is key. Consumption based bad debt is hurting. This needs to be curbed.

Environmental circumstance and poor behavioural choices are getting in the way. At this juncture it is hard to see a way out of the current [deepening] situation. It probably will get worse before it gets any better. South Africans are R1.6 Trillion in debt. Many households are beyond a 75% debt to income ratio. Many South Africans are one pay check away from poverty.

It is complex. There is no quick fix. More needs to be done. Soon.

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