Debt: The stark reality of trying times

Economists have long warned that South African consumers have an unhealthy relationship with debt and that rising debt levels are unsustainable. The situation has worsened during the last few months, with living costs increasing at the fastest rate in several years.

The latest statistical report on court summonses issued and judgments recorded, shows a new upward trend in civil debt cases.

According to the Statistics SA report, 46 869 civil cases pertaining to debt were recorded during May 2022 – either summonses for outstanding debt or judgments against people defaulting on their obligations.

The sharp increase compared with the 39 886 legal cases in April is concerning, but even worse is that the rising levels of cases are largely against private individuals rather than service providers and suppliers who go to court to get payment from a company.

The figures disclose that most of the summonses and judgments concern non-payment for professional services (such as medical doctors, dentists, advocates, attorneys, auditors, accountants, architects, engineers and hospital services) or other services (including payments for municipal services, plumbers, builders, mechanics, panel beaters and electricians).

Based on a survey at a selection of courts, Stats SA calculates that the number of cases related to the non-payment of services increased from 9 463 in April to 11 881 in May.

In total, courts served 12 204 civil judgments for debt amounting to R311.4 million.

Most cases (nearly 29%) concerned problems with regards to repaying loans.

Read: Why you should check your credit bureau record

Stats SA provides figures relating to individuals that give a glimpse into the difficulties people are facing.

The total value of judgments for civil debt against private persons increased by R67 million to nearly R255 million in May compared to R188 million in April.

Another shocking figure is that the value of judgments involving debt related to rental payments by individuals nearly doubled in May, to R34 million (R17.7 million in April). This figure only reflects the 854 cases in which courts have heard the case and issued a judgment. There were still another 787 summonses to be heard in court.

Unfortunately, another database on the financial troubles of people ran into problems. The Stats SA report on liquidations and insolvencies noted that figures relating to insolvencies have not been available since September 2021 following a cyber attack on the Department of Justice and Constitutional Development.

Household debt

Sebastien Alexanderson, founder and debt counsellor at National Debt Advisors, says the reality is that millions of South Africans have too much debt – and that the “addition” to their debt has worsened over the last decade.

“Given the current economic turbulence and its knock-on effects on the consumer – rising petrol prices and inflationary pressures – over-indebtedness will increasingly pose a significant threat to the financial well-being of South Africans,” he says.

Alexanderson quotes statistics from VeriCred Credit Bureau, showing that outstanding debt in SA reached nearly R2.1 trillion at the end of June and more than 717 000 people were under debt review.

“This reality needs to be seen within the context of the fact that the average South African is spending up to 75% of their disposable income on debt repayments. This is above the long-term average of 70% as reported by the SA Reserve Bank.

“The household debt-to-income ratio in SA currently stands at 67% and is expected to reach 75% by the end of 2022. A good debt-to-income ratio is less than 36%. Any ratio above 43% is considered too high and a sign of indebtedness,” says Alexanderson.

“South Africans need to be encouraged to find ways to live within their means – the inability to do so is at the heart of the problem.

“What starts out as a small credit card payment, car finance or store card can eventually lead to a debt-ridden warzone – often leaving you with little or even no cash left for household expenses,” he adds.

Pressure on consumers

One only needs to look at the latest inflation figures to appreciate the problem of rising costs and increased pressure on household finances. According to the recent Stats SA consumer price index survey, food prices increased by 9% year-on-year, electricity by 14.5% and fuel by 45%.

Increases in interest rates – ironically to fight inflation – added to the misery and will continue to do so for the next year or so.

Kondi Nkosi, SA country head at asset manager Schroders, says interest rates have been rising all over the world.

“In the US, the Federal Reserve has raised rates twice* this year already – by a quarter of a percentage point in March and by half a percentage point in May. They’re now at 0.75%-1% in the US and 1% in the UK after the Bank of England, the UK’s central bank, increased rates four times since December 2021,” he says.

In SA, the Reserve Bank increased its tempo to normalise interest rates after the prolonged period of low rates, to help the economy recover from the ravages of the Covid-19 pandemic.

“Locally, South Africa’s interest rate is at its highest level in five years – on 21 July, the South African Reserve Bank announced that interest rates would increase by 75 basis points, taking the repo rate to 5.5% and the prime lending rate to 9%,” says Nkosi.

“It’s anticipated that rates will continue to rise. Our economists at Schroders predict that rates in the US will reach 3% by the end of the year and that in the UK they’ll hit 2.25% sometime in the first quarter of 2023.”

She says it is important to note that higher interest rates won’t have an immediate impact on inflation as it takes time for the effect to filter through the economy, and that eventually higher interest rates promote saving, because we will earn more interest on our savings.

Read: Getting personal debt under control

Alexanderson urges people to get their finances in order and get to the point where they can start saving, rather than just struggling to keep up with debt repayments.

His top tips to break the debt trap include:

  • Avoid using credit. One of the first signs that indicate that your debt situation is spiralling out of control is when you start feeling like you must rely on taking up more debt on a monthly basis just to make it through the month. When this happens, it’s time to re-evaluate your living expenses and look at ways to live more frugally by not taking on any new debt.
  • Buy what you can afford, not what you can borrow. One way creditors might lure you into overwhelming debt is by offering you very attractive credit products that fall right at the edge of your affordability scale.
  • Start getting into the habit of saving. The importance of building an emergency fund for unplanned expenses cannot be emphasised enough. Not having a savings plan for emergencies often requires people to take out loans when the rainy days do come.

In fact, it looks like the rainy days are here.

*Note, the US Federal Reserve raised interest rates by 75 basis points on Wednesday.