The year 2016 holds a dire outlook for consumers, debt experts warn. Referring to building cost pressures on severely strained consumers, DebtSafe MD Wikus Olivier told Fin24 their only means of survival will be to adopt and cultivate a simpler lifestyle.
Over and above the usual factors that impact consumers’ pockets, such as the fuel and electricity price hikes, South Africa is experiencing a severe drought which is adding to food price pressures, said Debt Rescue CEO Neil Roets. He also warned of the potential of a few interest rate hikes in 2016. Roets said consumers will also feel the brunt of the depreciation of the rand when the impact on imported goods filters through.
Pointing to the already high unemployment rate of 25.5% and the addition of 2015’s matriculants to the job seeker pool, Roets says the outlook for 2016 “is indeed dire”. “We feel that 2016 is going to be a very tough year for consumers.” Consumers will turn to credit to get by.
Olivier said January, being a notoriously long month with everybody’s finances stretched to the max, will hit most consumers particularly hard. The weakening rand and severe drought will have a huge ripple effect on the cost of living, which will most likely see more people turn to credit to get by, he said.
Olivier said research done by DebtSafe at the beginning of 2015 to determine the effect of consumer spending during December on savings and debt repayment had revealed a bleak picture. Over 50% of the respondents indicated that they had difficulty servicing all their debt repayments during the month of January, with 13% of those saying they could not make any payment whatsoever. Forty-one % indicated that they overspent on their credit cards during December.
Lack of a plan
What was worrying was that more than half of the respondents indicated that they did not have a budget or financial plan. “There is no doubt that more and more consumers will fall behind on debt repayments this coming year,” cautioned Olivier.
Leigh Nooy of Summit Financial Services said although an early pay day in December feels great for most consumers, they lose sight of the fact that their December pay has to last extra long before the next pay day. To make matters even worse, January also has more than its fair share of expenses – school fees, stationary, uniforms and annual premium increases – to give your budget a pummelling.
“If you don’t have money ready in your savings account, January expenses can lead to emergency debt, which is the number one catalyst for over-indebtedness in South Africa,” Nooy warned.
Summit’s Friedl Kreuser says that the company has already seen consumers from both the private and public sector applying for debt review. These consumers, skewed to males between 31 and 45 years of age and earning between R7,000 and R15,000 per month, typically have around 11 accounts, mostly unsecured debt, with a debt-to-net-income ratio of around 85% (i.e. they spend 85% of their net income on debt instalments, or would if they were keeping their payments up to date).
Roets has seen a similar trend at Debt Rescue, with a dramatic year-on-year increase of 182% in the number of applications for debt review between 2014 and 2015. Debt Rescue’s consumer profile differs from that of Summit, with the company seeing a staggering 214% growth in numbers in the age group 21 to 25 years applying for debt review.
“This is indicative that our youth are not financially educated with respect to handling debt and tend to overspend, usually on luxuries. The ratio of female to male applicants has shown that more males are applying for debt review, but not by much,” said Roets.
“Although debt counselling is hardly the only solution, for those who qualify, we have been able to reduce interest rates from 24% to 3.6% on average, which goes a long way to reducing their debt instalments without stretching the repayment term too much,” said Kreuser.
“Sadly, the number of clients applying for debt counselling doesn’t seem to be decreasing, but at least with new case law and amendments to the National Credit Act, the debt counselling process is getting smoother and more reliable for those consumers who do apply.”
Olivier urged consumers who are finding it increasingly difficult to make timely debt repayments to speak to a debt counsellor before falling behind on repayments. Consumers are considered over-indebted when they are in arrears by three months or more on at least one of their accounts.