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What 2014 holds for cash-strapped consumers

While the year of the horse certainly does sound more promising than last year's ominous year of the snake, it may turn out to be just as venomous to consumers' finances. According to Chinese astrology, the horse year is considered a fortunate year that brings luck and good fortune; however, looking at the current condition of consumer finances, it may be more likely to bring a herd of creditors to the doors of consumers.

In order to determine the financial strength of consumers, there are two main indicators that can be examined. Firstly, the household sectors debt-to-disposable income ratio; and secondly, the household sector's savings ratio. Unfortunately, the current position of both of these is not very promising.

Household debt currently stands at 76% of disposable income. While this is not as worrisome as the 83.4% we saw in quarter one of 2008, it is significantly higher than the 50% of 2003.

According to the National Credit Regulator's (NCR's) Consumer Credit Market Report (CCMR), as of September 2013, the total outstanding consumer credit balance was R1.49 trillion. Furthermore, the total number of consumers with impaired credit records increased by 71 000 to 9.76 million from 9.69 million in the previous quarter, indicating that more than 48% of credit active consumers are struggling to meet their obligations.

Although concern had been raised previously about the spike in unsecured credit, there does appear to have been a slight slowdown in this area recently. According to the NCR's Credit Bureau Monitor, for the third quarter of 2013 there was a quarter-on-quarter decrease in both unsecured credit and short-term credit, while all other forms of credit increased.

Many households who participated in the unsecured lending boom are now unfortunately feeling the pressure. Taking into consideration that unsecured credit rose from R57 billion in the first quarter of 2010, to R80.8 billion in the first quarter of 2011, to R167.41 billion as of end September 2013 - several households have been affected. These households are now paying off these loans and are thus unable to borrow further, which may be the cause of the slight decline in unsecured credit in the third quarter of 2013.

Struggling to meet their repayments may also be the cause for many households not adequately saving. The 2013 FinMark FinScope study showed that by 2012, 83% of South Africans did not have any formal retirement, and 58% of adults admit they did not have enough money to save after covering all their spending needs. In December 2013, the National Savings Institute highlighted its struggle to change people's saving habits. With a household savings level at just 1.7% of GDP, South Africans need to start focusing on saving rather than spending.

Unfortunately, the above factors indicate that 2014 might be a difficult year for consumers. In particular, as interest rates have remained at the same, fairly low, level since August 2012, they are not encouraging improvement in household savings, nor household debt ratios.

When we then couple these factors with the increased spending that most likely took place over the festive season, the first quarter of 2014 may be a financial strain for many consumers. During the fourth quarter of 2012, the total value of new credit granted increased by 9.21% quarter-on-quarter, and it is expected that a similar increase occurred this past December.

Hopefully, the slight decrease in unsecured lending in the third quarter of 2013 indicates that consumers have learnt their lesson and are focusing their attentions on repaying their current debt rather than taking on further commitments. Only time will tell.

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Editorial contacts

Tina-Louise Rabie
Compuscan
(+27) 21 888 6127
trabie@compuscan.co.za