South Africa’s middle class is under severe strain amid rising living costs

Most South Africans want to save for their retirement, but the reality for many middle-income earners is that once they’ve paid for essentials most of what’s left is spent on repaying debt, says Benay Sager, head of DebtBusters.

Sager said that debt repayments now make up a substantial portion of what consumers need to spend, making saving difficult, if not impossible.

The company’s most recent quarterly Debt Index found that people applying for debt counselling with take-home pay of over R20,000 per month spend 60% of their monthly net income servicing debt. Their total debt-to-income ratio is over 130%.

While in other countries the total debt-to-income ratio is similar, most of the debt in other countries is low-interest bond debt – in South Africa, most of the debt is high-interest unsecured debt.

Sager said there are a few reasons for this. Real incomes have declined by 17% over the past five years as a result of inflation, while the latest CPI numbers will exacerbate the situation.

Many consumers were also forced to take significant and in some cases permanent, salary cuts during the past year to keep their jobs.

At the same time, the cost of essentials has gone up, forcing the consumers to borrow to make up the shortfall. Evidence of this is the 76% increase in unsecured debt levels since 2016 amongst consumers earning over R20,000 or more.

“Clearly the situation is unsustainable. Lack of savings makes consumers vulnerable should they be faced with an unexpected expense, lose their income or are forced to stop working.

“It also has broader economic implications. Ideally, consumers should build savings of three-to-six months’ worth of salary, but currently, this is almost impossible as a result of high debt levels.”

Disappearing middle-class

This is in line with data published by financial services company Transaction Capital, with the group warning that the Covid-19 pandemic and weaker economy has placed significant strain on the middle-class in the country.

Citing credit statistics, wage data and unemployment figures, the group said that overdue debt balances continue to increase, with a R33 billion increase seen in 2020 alone. It said that around 38% of loans are not in good standing.

This is combined with the highest unemployment rate in 12 years at 32.5%, deteriorating monthly income, and below-inflation increase.

As such, 34% of households in South Africa are forecast to fall out of the middle-class, it said.

This is further emphasised by wage data, with fewer South Africans reporting income in the R22,000+ wage range, while significantly more South Africans are seeing incomes of less than R8,000.

More to come

Neil Roets, chief executive of Debt Rescue, said that South Africans will need to brace themselves for further costs, which is bound to put consumers under increased financial pressure.

He noted that utility and fuel prices across the board have jumped drastically in July.

“While municipal costs increase annually, they are significantly compounded by rising petrol, diesel and illuminating paraffin costs, as well as electricity both direct to consumers or via municipalities.”

These latest cost increases follow months of increases across the board in the cost of food, clothing and transport, which have had a recurring negative impact on consumers’ financial standings and lives, Roets said.

As of July, consumers are paying:

  • Between 13.48% and 14.59% for electricity, depending on whether they live in Cape Town, Johannesburg or Durban. This follows Eskom’s 15% tariff hike that happened in April.
  • 4.3% more for refuse services, 2% more for property rates and 6.8% more for water and sanitation in Johannesburg. A water demand management levy of R28.32 has also been added per calendar month per residence that has its own meter.
  • 4.5% average increase in rates, 5% increase for water and sanitation and 3.5% for refuse removal in Cape Town; and
  • 4.9% for property rates, 4.9% for refuse and 8.5% for water and sanitation in Durban.
RatesCape TownJohannesburgDurban
Electricity13.48%14.59%14.59%
Water5.0%6.8%8.5%
Refuse removal3.5%4.3%4.9%

Motorists and commuters are bracing for a fuel increase on 7 July when petrol is expected to go up by 23 cents per litre, diesel by 38 cents and illuminating paraffin by 32 cents.

“Combined, this is an extraordinary set of increases for consumers to bear. We know that millions are buckling under financial pressure, thanks in large part to the increased impact of the coronavirus, specifically the surge in Gauteng on the back of the Delta variant, leading to a revised lockdown level,” said Roets.

“Many in the restaurant, hospitality and alcohol industries – as well as their extensive supply chains – have either been placed on short time, had their incomes cut or even lost their jobs as a result. While there is talk of a renewed form of TERS, it is, to say the least, carnage on the streets.”

In May, CPI hit a high of 5.2%, a sure signal that everyday costs are rising, he said. The main contributors to the rise in the consumer price index are food and non-alcoholic beverages, housing and utilities, transport and miscellaneous goods.

The impact on the cost of food has become so high – it recorded a 6.7% rise month-on-month, the highest increase since July 2017 – that 42% of 1,633 South Africans surveyed in May by Debt Rescue have taken out store cards to buy groceries, Roets said.

Consumer confidence

The FNB/BER Consumer Confidence Index meanwhile declined in the second quarter of 2021, pointing to continued depressed consumer confidence levels.

The decline in the CCI during the second quarter of 2021 can be ascribed to a deterioration in the economic outlook and the time-to-buy durable goods (e.g. vehicles, furniture, household appliances and electronic goods) sub-indices of the CCI, the reports’ authors said.

The confidence level of high-income households (earning more than R20,000 per month) slipped from -15 to -18 during the second quarter, while that of middle-income earners (i.e. households with a monthly income of between R2,500 and R20,000) edged down from -7 to -9 index points.

In both cases, the declines can largely be ascribed to a deterioration in the perceived economic prospects of the country.

“Consumers across all income groups are in all likelihood concerned about the adverse effects of renewed economic restrictions on the back of soaring Covid-19 infections, particularly given South Africa’s slow vaccination rate. Increasingly frequent load-shedding in recent months probably also dented consumers’ rating of South Africa’s economic prospects.”

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