Safari into consumer credit Financial health of the SA consumer Personal Finance Research Unit

1. Safari into consumer credit Financial health of the SA consumer Personal Finance Research Unit UNISA 15 October 2014 Kloofzicht Lodge

4. Overview Macroeconomic environment. Total income from work – on the macro level. How much more are workers receiving? Distributional/micro level individual income analysis. Actual “cash flow” income – inequality. Distributional credit/debt analysis. Debt to actual “cash flow” income. Debt service costs to actual “cash flow” income. Household consumption expenditure. Structural or cyclical shifts.

5. Macroeconomic environment not favourable

6. Impact on income from work (employees) Approximately 55% - 60% of nominal household income in 2013. Two sources: Gross earnings (Quarterly employment statistics - QES). Formal sector only, excluding agriculture. Compensation of employees (Gross domestic product – GDP). All formal and informal sectors.

7. Income from work > CPI target(Nominal Year over Year % change)

8. But can they purchase the same volumes?Real income from work per worker YoY % change

9. Percentage of annual income by income group

10. Distribution of income

11. Household income and debt

12. Calculating debt to income Not easy task. Two different methods yield two very different answers. Highly dependent on the definition of income. Government grants; Government transfers; Imputed rent; Adjustment in the reserves of households in retirement funds.

13. Debt to income ratio (2 methods)

14. Debt service cost to income ratio (2 methods)

15. Low income groups pay proportionally more debt service costs (M2)

16. Distribution of personal income tax (PIT), 2012

17. Interest rate increases Increase of 2 percentage points by end 2015 should increase debt service costs by R60 billion – conservative assumptions. Some 31% of individuals (in the mentioned five middle to low income groups in M2) with 5.35% of debt and 9.5% of debt service costs will be hit hard. However, according to M2 the highest indebted four groups, but especially the R180 000 to R325 000 will find it increasingly difficult to afford their expenditure and savings. M1 suggests that the R600 000 to R1.215 million is the highest indebted. Nevertheless, interest rate increases will affect consumption expenditure- and economic growth negatively. Current interest rate legislation increases the debt service cost on the “poor” disproportionally.

18. Household consumption expenditureStructural or cyclical shifts?

19. Structural or cyclical? • Continuous interplay between structural and cyclical movements. • Assess structural or cyclical changes – number of methods. • However, need to be confirmed by other tests.

22. Households’ contribution to structural spending, 2013

23. Households’ contribution to structural spending, 2013

24. Structural or cyclical? • Structural spending in some 20% of household consumption expenditure item groups. • Approximately 12% due to price and 8% as a result of volumes. • In volume terms – durable goods, security mostly purchased by high income households. • In volume and price terms – housing and medical services mostly purchased by R200 000 – R400 000 group. • Downward cyclical movement in most other goods and services.

25. Sources • Stats SA (CPI, QES, QLFS, GDP). • South African Reserve Bank (Quarterly Bulletin, BA 900, Interest rates). • National Treasury (Budget Review). • South African Revenue Services (Tax Statistics). • JSE (Statistics). • Momentum/Unisa Household Financial Wellness Index, 2013. • Bureau of Market Research at Unisa (Database and Research Reports). • International Monetary Fund (World Economic Outlook). • National Credit Regulator (Consumer Credit Reports). • Own calculations.

26. Thank you!