Prof Bernadene de ClercqBureau of Market Research,

UNISAMay 2014

Overview

• Economic environment during Q1 2014• Definition and Background to index• Measurement • CFVI Q1 2014 results and analysis• Debt servicing• Concluding remarks

Economic environment Q1 2014

• World economic growth is expected to increase to 3.6% in 2014 from 3% in 2013.

– Due to improved conditions in developed economies – US growth above trend (IMF).

• China’s economic growth slowed to 7.4% in Q1 2014 – slowest rate since Q3 2012.

• Risk of possible deflation / very low inflation in Europe due to weak economic activity.

• Ukrainian / Russian geo-political tensions remain problematic.

Impact on South Africa:– Exports under pressure – could impact job creation and household income – International capital flows – rand weaker – pressure on inflation – impacting buying

power of consumers

Imbalances in personal finances through knock-on effect of income impact on expenditure, debt servicing and saving capabilities

International economic forces

• Electricity supply shortages remain– Impacting domestic production and sales, job creation.

• Weak exchange rates during Q1 2014 (21.5% weaker against USD than in Q1 2013)– Recent strength provides relief, but remains volatile and vulnerable to domestic and global

sentiment.– Affects inflation, purchasing power of income, but may stimulate exports and job creation.

• Continued labour strikes in platinum mining sector– Strikers do not earn income while on strike and rely on transfers and expensive credit to

finance expenses.

• Interest rate increase and higher consumer price inflation– SARB increased the repurchase rate by 50 basis points in January 2014.– Possibility of additional increases .

Domestic economic factors impacting financial vulnerability

• Economic growth expectations for South Africa scaled down - IMF expects 2.3% growth for 2014 (WEO, April 2014), compared to previous forecast of 2.8% (Oct 2013).

• Outlook for household finances are expected to be constrained by slow employment growth (seasonally adjusted unemployment rate 25% in Q1 2014 from 24.7% in Q4 2013), high debt levels of consumers, slow rates of growth in credit extension and the higher interest rate environment.

Consumer finances to remain in risky territory.

Bleak outlook to also impact financial vulnerability

CFVI Q1 2014Results and analysis

Definition and backgroundto index

• CFVI launched in Q2 2009.

• Consumer Financial Vulnerability (CFV) is defined as:– being financially affected to such extent;– that it creates an actual experience and/or sense;– of being financially insecure and/or an unable to cope financially.

• The Consumer Financial Vulnerability Index (CFVI) reflects consumers’ sense/experience as to the state of their cash flow position, which constantly is influenced by macro- and micro-economic factors.

• Comprehensive consumer finance indicator as it gauges the individual components of consumer finances separately and in one composite index.– Income– Expenditure– Savings– Debt servicing

Measurement

Financially secure

80 - 100 Extremely secureCash flow position is under control with little

threat of becoming financially vulnerable.60 - 79.9 Very secure

Financially exposed

50 - 59.9 Mildly ExposedCash flow affected to such extent that it

creates a high risk of becoming financially vulnerable/secure.

40 - 49.9 Very Exposed

Financially vulnerable

20 - 39.9 Very vulnerableCash flow affected to such extent that it creates an actual experience or sense of

being financially insecure and unable to cope. 0 - 20 Extremely vulnerable

Overall CFVI

Q2

2009

Q3

2009

Q4

2009

Q1

2010

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2010

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2010

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2010

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2011

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2014

0

10

20

30

40

50

60

70

52.856.1

58.9

51.1 52.050.2• During Q1 2014 consumers

remained mildly exposed to risks that affect their financial vulnerability.

• Overall score of 50.2 points just above very exposed category.

Consumers experienced tougher conditions in terms of income, expenditure and debt servicing.

Date Savings Expenditure Debt servicing Income Overall CFVI

Q1 2012 58.8 60.1 56.6 57.6 58.9

Q2 2012 47.5 53.8 47.8 44.8 48.6

Q3 2012 42.1 54.4 48.1 46.8 47.9

Q4 2012 48.7 52.3 52.2 47.2 50.1

Q1 2013 49.6 51.0 54.0 49.6 51.1

Q2 2013 44.8 52.4 53.8 43.4 46.7

Q3 2013 44.8 45.2 51.6 42.1 45.9

Q4 2013 49.9 53.5 53.7 51.3 52.0

Q1 2014 50.2 ↓ 52.9 ↑ 46.6 ↑ 51.0 ↑ 50.2 ↑

Income vulnerability impacted by seasonal employment

• Employment:– 497 000 more employed in Q1 2014 vs Q1 2013, but 122 000 fewer employed vs Q4 2013.– Seasonal worker “retrenchments” (in construction and trade) in Q1 2014 should negatively

affect consumer income.

2008

Q1

2008

Q2

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2009

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2014

Q1

-40

-30

-20

-10

0

10

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30

40

-100

-50

0

50

100

150

Construction Trade Total employment (RHS)

Income vulnerability impacted by seasonal employment and strikes

• Employment in mining sector:

– Due to strikes of some 80 000 workers, their households are without such income earning abilities.

– Direct impact on total income is relatively small (less than 1% of total employed), but spill-over effects are large (mining profits, suppliers, retailers, manufacturing).

– Seasonal analysis of employment in the mining sector showed that on average more individuals are employed in Q1 and Q2, while less are employed in Q3 and Q4.

– A change in this pattern should emerge for Q1 2014 because of strikes.– Income loss thus not only to strikers, but also seasonal mining workers.

Income vulnerability affects expenditure

• Expenditure impacted by:– Increasing income vulnerability;– Higher inflation, also impacting volumes purchased;

• Marked upward trend (latest 6.0% recorded for March 2014)• Main contributors were transport costs (mainly petrol and maintenance) [8%

growth, contributing 16.7%] and food prices [5.6% growth, contributing 14%] • Petrol prices (93 octane) have increased by R1.14/litre during Q1 2014

– Credit restrictions.– Income, inflation and credit restrictions affected YoY retail sales growth that increased

only 2.2% in February.

Debt servicing vulnerability

Debt servicing vulnerabilityQ

2 20

09

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2014

30

35

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45

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55

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65

70

Fin

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Exp

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Fin

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Vu

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Fina

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ecur

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• Household liabilities (R1 572 billion in Q4 2013), of which credit is the largest component, remained high in 2013 relative to household disposable income (75%).

• However, the pace at which credit is granted to households moderated further (5.2% YoY growth in Q1 2014 vs 6.2% in Q4 2013).

• Due to among others the pressure on income and expenditure, stricter credit granting criteria and higher interest rates, consumers struggled to service their debt.

Debt servicing under severe pressure in Q1 2014

Changes in credit environment

• Lending practices have become stricter - more applications for credit are rejected.

2007 Q4 2010 Q4 2013 Q4

% applications rejected 41.3% 43.2% 57.4%

• Growth in total debtors’ book has slowed during 2013.

• Consumers repay larger portion of debt - place expenditure under pressure (Larger part of income used to repay debt).

2010

Q1

2010

Q2

2010

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2010

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2011

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2011

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2011

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2011

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2013

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2013

Q40%

2%

4%

6%

8%

10%

12%

Annual growth in debtors bookRepayments & write-offs as % of total debtors book

Types of credit

• Annual growth in credit granted slowed during 2013• Only mortgages recorded higher year-over-year (YoY) growth during 2013 • Unsecured credit declined 25.65% (YoY) in Q4 2013

2010

Q1

2010

Q2

2010

Q3

2010

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2011

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2011

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-40%

-20%

0%

20%

40%

60%

80%

-25.65%

Mortgages

Secured credit

Credit facilities

Unsecured credit

Short-term credit

Debt servicing costs

• Debt service costs as ratio to disposable income stabilised at 7.7% in Q4 2013 (South African Reserve Bank).

• Debt service costs up R11.9 billion between Q4 2012 and Q4 2013 amounting to R162.6 billion (seasonally adjusted and annualised in Q4 2013).

• Debt service costs due to increase further as a result of increase in repo rate.

Q1

2009

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2009

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2009

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2009

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0%

2%

4%

6%

8%

10%

12%

14%

Ratio of debt-ser-vice cost to dis-posable income

• Conservatively, the increase of 50 basis points in the repo rate increased debt servicing costs by R8.4 billion, or R700 million per month (at current debt levels).

• Should debt levels remain unchanged, another increase of 50 basis points will increase the debt servicing costs by R16.2 billion (combined impact of 100 basis points increase).

• However, should liabilities increase only 5% in 2014 and the repo rate by 100 basis points, total debt servicing costs will increase by R25 billion to R183 billion.

• This will cause severe hardship among especially low income earners.

Impact of change in interest rates on debt servicing

Who carries the debt burden?New credit vs debt servicing cost

• Debt servicing costs may be higher due to NCA’s prescriptions on maximum interest rates that may be charged on different types of credit.

• Individuals in higher income categories (earning above R180 000 per annum) obtain the largest share of new credit (more than 70%) and therefore are responsible for a large portion of debt servicing costs.

• Individuals in lower income categories (earning below R66 000 per annum) share disproportionately debt servicing costs as they borrow at higher interest rates.

Concluding remarks

• Due to volatile macroeconomic circumstances consumers remain financially vulnerable.

• Consumers felt financially very exposed in terms of debt servicing capabilities during 2014 Q1.

• An increase in interest rates have a greater impact on the lower income groups as they carry the debt burden disproportionately (they also have the largest share of credit accounts).

• Lower income groups therefore struggle financially as they are most likely to default on excessive debt, their income is limited and cost of making a living is high – policy changes need to consider the impact on these consumers.

Thank you

Who carries the debt burden?New credit vs debt servicing cost

20

09Q

220

09Q

320

09Q

420

10Q

120

10Q

220

10Q

320

10Q

420

11Q

120

11Q

220

11Q

320

11Q

420

12Q

120

12Q

220

12Q

320

12Q

420

13Q

120

13Q

220

13Q

320

13Q

4

2009

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2010

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New credit Debt servicing cost

0%

10%

20%

30%

40%

50%

60%

70%

80%

13.3%8.8%

14.2% 14.3%

66.1%

73.8%

66.2% 65.0%

R0 - R5500 R15000+

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