Huge debt squeeze for consumers

Durban – Economists have urged South Africans to tighten their belts and brace themselves for a rocky year ahead with higher food and fuel prices set to hit pockets hard as the rand continues to wobble.

And, rubbing salt in the wound, South Africans have also been warned to ready themselves for an interest rate hike this month – which will see repayments on cars, bonds, personal loans and credit cards increase.

An income tax hike is also on the cards when the Budget is presented next month as the government scrambles to find more money for universities in the wake of the #FeesMustFall protests.

Neil Roets, chief executive of debt management firm Debt Rescue, said the drought, the likelihood of an electricity price increase and the probability of a tax increase would squeeze consumers to the maximum.

Roets said that a recent World Bank survey revealed that South Africans were the biggest borrowers in the world with 86% having debt.

According to the latest statistics released by the National Credit Regulator, just less than 50% of all credit-active consumers were over-indebted, because they were in arrears by three months or more on at least one of their accounts.

Roets said their statistics showed there had been a dramatic increase in the number of applications for debt review between 2014 and 2015, with a 182% growth year-on-year.

“When analysing the age groups of applicants, we have found that there was a phenomenal growth of 214% in the age group for 21-25 years of age. This is indicative of the fact that our youth are not financially educated with respect to handling debt and tend to overspend.

It is better to save and buy cash and vitally important to live within your means… Distinguish between what you need and what you want – do not try to keep up with the Joneses,” Roets said.

He said the depreciation of the rand would increase the woes of severely strained consumers during the early part of this year when the impact on imported goods would be seen.

“Unemployment is at more than 25.5%, and the matric class of 2015 will add more than 800 000 job seekers to the job market. Add to this the speculation of a few potential interest rate hikes, and the outlook for 2016 is dire.”

“The ratings agencies, including Fitch and Standard & Poor’s, have all warned that South Africa’s bonds could be reduced to junk status if the economy was not better managed. Should this happen, it would lead to an inevitable interest rate increase, which would have a severe impact on deeply indebted consumers.”

The rand plunged to an all-time low of R18 to the US dollar on Monday. It remained under pressure and was trading at R16.88 to the dollar.

“It is not business as usual. We are going through a very unusual situation,” Dr Iraj Abedian, an economist with Pan African Investment, said yesterday.

“Everything that is important to people is going to cost materially more over the coming months. People should expect higher inflation. They should expect pressure on their income, and pressure on their savings. What needs to be done is that people should reduce their consumption and restructure how they spend. By every means they should try to pay their debt,” he said.

Abedian said the plunge of the rand this week was “not good news at all”.

“This instability also reflects poor governance of the economy and suggests that the country’s economic policy is not credible,” he said.

The 9.9% slump of the rand on Monday – the most since the 2008 global financial crisis – when it fell to R17.90 against the dollar moved the country close to recession and possible credit-rating downgrade to junk as investors took flight, economists said.

Rand Merchant Bank Currency Strategist, John Cairns, said that among the factors affecting the rand was that investors appeared to have lost faith in South Africa given its slow growth and worries over the state of government finances.

“The rand is very volatile at present and even the smallest shock could send it running again. However, the rand is heavily oversold and very undervalued.

“The inflationary consequences of the weak rand will probably force the SA Reserve Bank to hike rates. We at RMB expect the monetary policy committee to hike by 25 basis points later this month and they could even hike by 50 basis points,” he said.

“Biggest borrowers in the world”

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