Household debt level to income ratio rises

JOHANNESBURG – Data released by the South African Reserve Bank (Sarb) in its Quarterly Review showed that the household debt level to disposable income ratio rose slightly to 71.3% in the second quarter from 70.9% in the first quarter as disposable income fell faster than household consumption expenditure.

The good news from a personal finance point of view was that the money spent on financing the debt was steady at 9% of disposable income, in part thanks to the 25 basis points cut in the repo rate to 6.5% announced by the Sarb in March.

The bad news is that the average overdraft rate charged by commercial banks only dropped by 19 basis points between March and July, which is the latest available data.

Since the Sarb’s first cut by 25 basis points in July 2017, the average overdraft rate has only been reduced by 29 basis points, so banks have passed on only 5% of the 50 basis points cut since July 2017.

Real final household consumption expenditure contracted by 1% on a quarter-on-quarter seasonally adjusted annualised basis in the second quarter after a 0.9% rise in the first quarter, while disposable income fell by 1.3% in the second quarter following a 1% rise in the first quarter.

In 2017, consumption rose by 2.2%, while income jumped by 2.8%, and in 2016 spending increased by 0.7%, compared with a 1.9% gain in disposable income. This meant that the personal saving rate became positive in 2017 for the first time since 2005 at 0.3%. This thrift ethic continued into the second quarter, with the savings ratio rising to 0.4% from 0.3%.

The Sarb said household spending was also suppressed by diminishing wealth effects in the first eight months of 2018, as the FTSE/JSE All Share Index trended gradually lower amid heightened volatility driven by increased risk aversion towards emerging market economies, together with weak domestic economic activity and policy uncertainty, particularly regarding land expropriation without compensation.

A recovery in household spending and income is expected in the third quarter due to a round of above-inflation wage increases that became effective from July.

According to Andrew Levy Employment Publications, the average wage settlement rate in collective bargaining agreements was 7.3% in the first half of 2018, compared with 7.8% in the same period in 2017.

The better employment and wage prospects in the third quarter are to a certain extent already reflected in the instalment sale credit and leasing finance data.

This credit category is predominantly used to finance purchases of new and used vehicles by the household sector and this category increased by R5.3billion in the second quarter of 2018, compared with a R4.1billion gain in the first quarter.

– PERSONAL FINANCE