The high interest rates continue to place financial pressure on South Africa’s households, the latest Altron FinTech Household Resilience Index (AFHRI) shows, noting that over the last three years, the high interest rates have kept the average debt cost burden of households at its highest level in 15 years.

According to AFHRI’s third quarter 2024 report, while the recent lowering of the repo rate and, consequently, the prime overdraft rate, has had a marginal positive impact on the AFHRI, the year-on-year increase of 2.1% was overshadowed by zero growth in the ratio of household income to debt.

“One of the most worrying trends in the latest AFHRI is the fact that the ratio of household income to debt costs is almost 9% lower than in the first quarter of 2020,” said economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech.

He explained that, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs, a ratio that had since increased by 36%, with households now having to spend 9.1% of their disposable incomes on servicing debt.

“It is a pity that the Reserve Bank’s Monetary Policy Committee (MPC) seems to have overplayed its hand in attempting to tackle an inflation problem that was never caused by excessive demand in the economy, but rather by the massive increases in energy costs and global freight shipping charges owing to the Covid lockdowns,” said Botha.

The restrictive monetary policy stance of the MPC has come at a substantial cost to the economy, and the extent of the loss of purchasing power among households is alarming.

“The decision by the MPC at the end of 2021 to follow a restrictive monetary policy stance has resulted in a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks,” he said.

“In the event of the ratio between household debt costs and disposable income having stayed at the same level as in the first quarter of 2022, when the repo rate increase started to bite, calculations show that South African households would have had an additional R200-billion to spend and gross domestic product growth would have been considerably higher.”

South Africa’s prime rate was 7% at the end of 2021, before increasing to 11.75% in May 2023, where it stayed for 16 consecutive months, representing an “unheard-of” increase in the cost of credit.

“At an annualised rate of merely 3%, consumer inflation is now exactly at the bottom mark of the Reserve Bank’s inflation target range of 3% to 6% and the MPC is fast running out of reasons to maintain its overly restrictive monetary policy stance,” Botha highlighted.

“This is vindicated by the fact that the real prime rate (prime minus inflation) has continued to rise and now stands at 8.3% – one of the highest commercial lending rates in the world.”

“What is even more perplexing, from the perspective of the quest for higher economic growth, is the fact that the real prime rate stood at 5% at the beginning of 2020 (prior to the Covid pandemic), which means that the real cost of credit (and of capital) in South Africa has now increased by 66%.”

Further, the declining value of total household credit extension, in real terms, remains a concern for South Africa’s growth prospects.

Between the second quarter of 2020 and the third quarter of 2021, household credit extension increased by R16.5-billion. However, a combination of the July 2021 KwaZulu-Natal riots and economic constraints imposed by electricity loadshedding and inefficiencies in the country’s logistics infrastructure had halted this progress.

More constraints followed, with the highest commercial lending rate in 14 years predictably lowering the affordability of servicing credit, Botha commented.

“As a result, the real value of household credit extension declined by more than R20-billion between the third quarter of 2023 and the third quarter of 2024.”

“Hopefully, the MPC will lower rates further early in 2025, which would be an important trigger to lift the country’s growth rate and create more jobs,” he continued.

Meanwhile, Botha pointed out that there were a number of positive trends that had emerged among the AFHRI’s key indicators.

He cited an increasing private sector employment rate, which was at a higher level than before Covid.

“It is clear from a variety of gauges of business confidence, including the latest S&P Global Purchasing Managers’ Index for South Africa, that the private sector is anticipating a revival of economic growth – a prospect that will be further enhanced in the event of interest rates continuing to decline.”

In addition, following a lengthy period of decline, real levels of labour remuneration in the private sector have increased, both on a quarter-on-quarter and year-on-year basis.

Botha also pointed to the rise in the ratio of household wealth to household income, a proxy for non-salaried income for many households, which was bound to increase further in an environment of lower interest rates and increased spending on infrastructure.

“The latter seems bound to accelerate now that the Government of National Unity has prioritised higher economic growth in a partnership with prominent business leaders.”

“The AFHRI and other economic indicators continue to demonstrate that lowering interest rates is essential to restore household purchasing power and stimulate economic growth in South Africa. South Africans are resilient, but it is time to provide some relief and spur employment, investment, and accelerated economic activity,” said Altron FinTech MD Johan Gellatly.

“Even as we remain alert to the possibility of improved credit conditions, we are actively assisting our customers to navigate the challenging economic conditions by continuing to grow market share and leveraging our innovative, cost-friendly fintech solutions,” he concluded.