Household Financial Resilience Index Afhri Q3 2024

In recognising the need for data that provides more clarity on the financial disposition of households in general, and their ability to cope with debt in particular, Altron FinTech commissioned economist and economic advisor to the Optimum Investment Group, Dr Roelof Botha, to assist in designing this index. The index comprises 20 different indicators, all of which are directly or indirectly related to sources of income or asset values. The AFHRI is weighted according to the demand side of the short-term lending industry and calculated every quarter, with the first quarter of 2014 being the base period, equalling an index value of 100. All the indicators are expressed in real terms, i.e. after adjustment for inflation.

Media Release

Johannesburg, 30 January 2025 – The results of the Altron FinTech Household Resilience Index (AFHRI) for the third quarter of 2024 were released today, confirming the continued financial pressure on South African households, mainly due to the high interest rates over the past three years, which have kept the average debt cost burden of households at its highest level in 15 years.

According to economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech, the recent lowering of the repo rate (and, consequently, the prime overdraft rate) has exerted a marginal positive impact on the AFHRI, with the year-on-year increase of 2.1% being overshadowed by zero growth in the ratio of household income to debt. “It is quite obvious that the restrictive monetary policy stance of the Reserve Bank’s Monetary Policy Committee (MPC) has come at a substantial cost to the economy,” says Botha.

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 (pre-COVID-19). “It is a pity that the 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 due to the Covid lockdowns,” says Botha. “In the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs. This ratio has since increased by 36%, with households now having to spend 9.1% of their disposable incomes on servicing debt.”

“The extent of the loss of purchasing power amongst households is alarming. 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 GDP growth would have been considerably higher,” notes Botha.

“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,” notes Botha. He points out that South Africa’s prime rate was 7% at the end of 2021, but jumped 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,” says Botha. 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 (before the Covid pandemic), which means that the real cost of credit (and of capital) in South Africa has now increased by 66%. 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,” says Botha.
 
Ever since the MPC embarked on an ill-conceived campaign to combat supply-side inflation via severely restricting demand in the economy, a host of key economic indicators and trends have turned negative. A selection of the evidence pointing to the huge economic cost of long-standing overly restrictive monetary policy is provided below.

Property market woes

South Africa’s residential property market has taken a severe knock as a result of record-high interest rates, with the value of building plans passed having declined by 20% in real terms over the past three years. Predictably, the BetterBond Home Loan Index shows a pronounced inverse relationship with the prime overdraft rate. This index confirms the negligible negative effect of the Covid lockdowns, with a sharp recovery in home loan applications having occurred within merely one quarter.

In sharp contrast, the restrictive monetary policy that kicked in during 2022 took the wind out of the sails of the residential property market, with the fourth quarter BetterBond Home Loan Index still 28% lower than in the first quarter of 2022. Unless interest rates decline to pre-COVID levels or lower, the prospects remain dim for a new, sustained growth phase in the housing market.

Household credit dries up

The declining value of total household credit extension (in real terms) remains a point of huge concern for South Africa’s growth prospects. It should be pointed out that mortgage loans represent the bulk of household credit, with this instrument traditionally facilitating a significant portion of private sector capital formation. On the basis of four-quarter averages (which eliminate seasonal trends), the lockdowns imposed during the Covid pandemic did not materially deter the rising trend in credit extension that kicked in shortly after the end of the state capture era.

Between the second quarter of 2020 and the third quarter of 2021, household credit extension increased by R16.5 billion, but progress was then halted due to a combination of the July 2021 KwaZulu-Natal riots and economic constraints imposed by electricity blackouts and inefficiencies in the country’s logistics infrastructure.

More constraints were to follow, with the highest commercial lending rate in 14 years predictably lowering the affordability of servicing credit. 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. It is simply not possible for the economy to grow at a meaningful rate unless credit extension is rising in real terms.

Lack of demand leads to unutilised capacity

A further indictment of South Africa’s overly restrictive monetary policy can be found in the fact that capacity utilisation in the manufacturing sector has not yet recovered to pre-COVID levels. A declining trend in this key indicator kicked in between the third quarter of 2013 and the end of 2018, mainly due to the negative effects of state capture and infrastructure inefficiencies.

A modest recovery ensued immediately after President Ramaphosa assumed the country’s highest office, but progress was thwarted by the Covid pandemic and, subsequently, by record-high interest rates, which dampened demand in the economy via a sharp increase in debt servicing costs. Between the fourth quarter of 2018 and the third quarter of 2024, capacity utilisation in manufacturing has declined by 5.7%.

The adverse impact of restrictive monetary policy on demand in the economy is confirmed by its dominant role in declining capacity utilisation. This trend has also served to aggravate inflation by raising fixed overhead costs per unit in the manufacturing sector, which means that the country’s restrictive monetary policy has been damaging the economy via self-inflicted upward pressure on cost-push inflation.

Results of the AFHRI for the third quarter of 2024

The table below summarises the percentage change in real terms of the indicators comprising the AFHRI over three different periods: since Q1 2020 (the last comparable quarter before the COVID-19 lockdowns); quarter-on-quarter; and year-on-year. The period since the first quarter of 2020 is regarded as relevant to gauge whether or not the financial resilience of households has fully recovered from the pandemic.

The downside

In assessing the latest trends emanating from the constituent indicators of the AFHRI, it is important to take cognisance of the spike in the indicators for long-term insurance surrenders and lump-sum pension payments. These have been influenced by the so-called two-pot retirement system, which commenced in the third quarter of 2024 and which has led to a dramatic increase in retirement fund withdrawals. When these two indicators are excluded, the AFHRI’s year-on-year and quarter-on-quarter increases both drop to below one per cent.

Compared to the first quarter of 2020 (before the Covid lockdowns) eight of the 20 indicators comprising the AFHRI remain in negative territory.

On a positive note

Fortunately, a number of positive trends have emerged amongst the AFHRI’s key indicators.

• Private sector employment has increased and is at a higher level than before COVID-19. 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.

• 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.

• The rise in the ratio of household wealth to household income, which serves as a proxy for non-salaried income for many households, is 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 MD of Altron FinTech, Johan Gellatly, notes that while the AFHRI shows that South African households remain under considerable financial pressure, Altron FinTech remains well positioned to assist customers to take advantage of green shoots.

“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. At Altron FinTech, we are constantly working alongside our customers to enable them to answer the challenges of the moment. Even as we remain alert to the possibility of improved credit onditions, 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,” Gellatly says.

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