TransUnion, a provider of credit and information management, has released the latest South African Consumer Credit Index (CCI) report, which shows a decline in the index to 51.2 in the third quarter of 2015, down from a revised 53.6 in the second quarter. New account defaults and distressed borrowing levels have seen a marginal increase, although both indicators were relatively neutral and do not show either materially worsening or improving credit behaviour.
The CCI is a unique indicator of consumer credit health measuring the ability of consumers to service existing credit obligations within the constraints of their monthly household budget. It is based on a 100-point scale, where 50.0 is the break-even level between improvement and deterioration of credit health.
“While the CCI remains above the 50 point break-even mark, the decline in the index compared to previous quarters of the year shows that improving trends in consumer credit health have slowed and are possibly starting to reverse course,” said Owen Sorour, senior vice president, analytic and decisioning solutions at TransUnion. “Consumer credit health is only marginally better compared to the same quarter a year ago, despite a period of relatively soft inflation. This highlights South Africa’s weak Gross Domestic Product (GDP) growth, which at around 1.5% is well below the historical average. Despite the somewhat encouraging official employment statistics for the 3rd quarter, the broader trend is still one in which new job opportunities are scarce, salary increases are barely keeping pace with inflation, and in general consumers are feeling the pressure.”
Rate of decline in defaults has slowed
According to the TransUnion payment profile database, by February 2015 new consumer loan defaults (accounts three months in arrears) were declining by 8.3% year on year, meaning that there were fewer new defaults occurring. In the second quarter of 2015, the rate of decline was 5.0% and by the end of Q3 2015, the rate of this decline had slowed to just 1.6% year on year. While there are still fewer people defaulting on their accounts than in previous years, the rate of improvement has slowed significantly and indicates that the pressure on consumers’ credit health is starting to increase.
Revolving credit usage remains stable
The TransUnion distressed borrowing indicator deteriorated marginally in the third quarter, with more people resorting to borrowing money in order to pay off debt or general expenses. Distressed borrowing shows the amount of revolving credit such as credit cards and store cards used by consumers as a percentage of their overall credit limit. The index shows a marginal increase in distressed borrowing of 0.8% when comparing the figures to Q3 2014. Despite marginally more distress in the 3rd quarter, the overall trend still shows improvement, and the figures from the second and third quarters of 2015 suggest neither significant improvement nor worsening in financial distress.
On-going household cash flow strain
The household cash flow index weakened in the 3rd quarter, although the decline too was marginal and cash flow remains better than during 2014. Lower rates of inflation on essential purchases (non-discretionary items) have contributed to this trend. In 2015 so far, non-discretionary inflation has averaged 3.8% year on year, while from 2011 to 2014 it averaged 5.8% year on year. The South African Reserve Bank (SARB) raised the benchmark repo rate from 5.75% to 6.00% during the 3rd quarter, which has resulted in debt service costs increasing slightly.
“Many factors have contributed to the trends observed in this quarter’s report,” said Sorour. “Interest rates have increased slightly and we can expect that they will continue to do so. The petrol price has risen once again, electricity costs increased in the quarter, and the rand exchange rate remains volatile. While none of these factors are very significant in their own right, when combined and coupled with South Africa’s weak economic growth, they indicate that consumers will be feeling the pressure for some time to come.”
The outlook for consumers and credit providers
The decline in the index for the third quarter of 2015 represents the largest single quarter drop since the first quarter of 2012. It is also a fairly sharp reversal of the upward trend that has been experienced since the first quarter of 2013.
The weak economic environment has caused concern in policy and financial circles of an impending recession should things not take a turn for the better. “Numerous analysts are now arguing that recession risks have risen substantially,” said Sorour. “While no single indicator of consumer credit health shows a significant decline, a prolonged period of difficulty since 2008 and low levels of liquid household savings make the consumer sector vulnerable to these macroeconomic headwinds. We are beginning to see this in increased defaults in areas such as automotive and banking loans, typically the first areas to indictate a worsening situation.
“While businesses will not be affected by this trend for some time, eventually reduced consumer spending will result in pressure on business margins. Once again we are already seeing this in the automotive market, with the rate of new car sales declining and the price of vehicles remaining stable or even beginning to fall. This will eventually have a knock-on effect to other non-essential goods, putting pressure on local business. The general outlook calls for conservative behaviour. Although the festive season is upon us, now is not the time to spend money you do not have.”