Johannesburg – As South Africans gear down for the festive season, a debt management company is warning that they risk over-extending their wallets and ending up in financial difficulty come January.
This is now especially the case after the South African Reserve Bank raised the repo rate last Thursday, taking the prime lending rate to 9.75 percent.
The move – on the back of concerns that inflation will breach the 3 percent to 6 percent target band – came as, of the 26 economists surveyed by Bloomberg, 16 predicted the rate would stay unchanged, while the rest expected a quarter-point increase.
Neil Roets, CEO of Debt Rescue, warns the festive season is a time when many South Africans splurge, even though they can’t afford to. He says, “we see more new clients seeking help in January and February than during any other month of the year because of additional debts that had been stacked up during the holiday season.
“Parents suddenly realise that they have to pay school fees that had not been budgeted for and, with credit cards maxed out on luxuries in November and December, many have no choice other than to seek relief by going under debt review to prevent debt collectors from seizing their property.”
Roets said many employees get paid early in December which creates a feeling of well-being and that they suddenly have extra cash to spend.
“They forget that the time between their early pay check in December and the next check at the end of January can be the longest five or six weeks of the year.”
Roets, warning that 2016 was going to be a tough year, said people should stick to cash and use a bonus – should they get one – to settle debt.
“The 25 basis point increase in the repo rate announced by the reserve bank could push food inflation as high as 10 percent with catastrophic results for deeply indebted South Africans. Eskom will almost certainly get a hefty increase in the tariffs they charge for electricity which is further going to exacerbate the situation.
“The combination of the severe drought in prime food producing areas coupled to the weakening of the rand is going to have dire consequences for cash-strapped consumers in the new year.”
Rhys Dyer, CEO of home loan originator ooba, notes the hike equates to a monthly increase of around R170 per R1 million. “But factor in the current drought, increasing costs of home ownership, electricity costs, petrol prices and rising credit default rates and consumers are likely to be facing a tough year ahead”.
Dyer adds: “My advice to prospective buyers is to afford themselves some breathing room in regard to their financial commitments because we believe further rate increases are on the cards for next year.”
Lew Geffen, chairman of Lew Geffen Sotheby’s International Realty, said the rate hike was a double-whammy for cash-strapped home owners.
“There is also a knock-on effect for consumers. The South African economy is stagnant, the currency is under enormous pressure, we are facing the prospect of having to import staple food stuffs for the first time in nearly a decade and electricity prices will continue to rise at a rate far above inflation.
“We are already seeing growing debt defaults and the irrational exuberance that prevailed in the property market previously has calmed down to just exuberance,” said Geffen.
“Sellers need to curb their expectations and with more rates hikes in the offing, 2016 will not be an easy year for home owners.”
Total consumer debt is now at almost R1.6 trillion, which is more than the country’s budget, and most indebted consumers already owe 75 percent of their monthly pay to creditors, according to the latest stats. More than half are three months or more behind in their debt repayments.