Continued financial pressure on South African households, Download the index for further information.
“The excessively restrictive stance of monetary policy remains a point of huge concern for the millions of indebted households and businesses,” says Botha.
Background to the AFHRI
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 on a quarterly basis, with the first quarter of 2014 being the base period, equalling an index value of 100. All of the indicators are expressed in real terms, i.e., after adjustment for inflation.
The latest Altron FinTech Household Resilience Index confirms negative impact of high interest rates on household debt costs
Johannesburg, 16 July 2024 – The results of the most recent Altron FinTech Household Resilience Index (AFHRI) were released today, confirming the continued financial pressure on South African households, mainly the result of the ongoing restrictive monetary policy stance by the Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB).
According to economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech, arguably the most worrying trend in the latest AFHRI is the year-on-year decline of 8.7% in the ratio of household income to debt costs. “Merely two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs”, notes Botha. “This ratio has since increased by 37%, with households now having to spend 9.2% of their disposable incomes on servicing debt”.
“It is no surprise that this dramatic increase in the debt servicing costs of households coincided with the decision by the Monetary Policy Committee (MPC) of the Reserve Bank at the end of 2021 to follow a restrictive monetary policy stance”, says Botha. “This has resulted in a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks.
Botha points out that South Africa’s prime rate was 7% at the end of 2021, but has now jumped to 11.75%, representing an unheard-of increase in the cost of credit (and capital) of 68%. He points out that unwarranted increases in lending rates have a stifling effect on demand in the economy, especially household consumption expenditure and new investment in productive capacity by the private sector.
The AFHRI has an inverse relationship with domestic lending rates – the higher the SARB’s repo rate (and the linked prime overdraft rate) – the higher the cost of credit and working capital, which negatively impacts the financial disposition of households.
The graph illustrates the AFHRI trend based on a four-quarter average, which eliminates seasonal variances. A pronounced recovery and new growth impetus occurred shortly after the worst of the COVID-19 period, but this was clearly halted in its tracks and then reversed by the restrictive monetary policy of the MPC.
The table below summarises the performance of the different indicators comprising the AFHRI over four different periods, i.e.: since the base period (Q1 2014); since the last comparable quarter before the COVID-19 lockdowns – Q1 2020; quarter-on-quarter; and year-on-year (percentage changes in real terms). The period since the first quarter of 2020 is regarded as relevant to gauge whether the financial resilience of households has fully recovered from the pandemic or not.
In assessing the latest trends emanating from the constituent indicators of the AFHRI, the following may be regarded as red flags for economic growth prospects:
Despite the first quarter decline in the AFHRI, some positive trends exist amongst key constituent indicators, including the following:
“The excessively restrictive stance of monetary policy remains a point of huge concern for the millions of indebted households and businesses,” says Botha.
“Despite inflation having moved to a comfortable level of close to the mid-point of the Reserve Bank’s target range of 3% to 6%, the MPC’s dogged insistence to maintain a real prime rate of between 6% and 7% defies logic, as this rate is now 126% higher than the average real prime rate that existed in 2014, just before the retirement of Gill Marcus, the previous Governor of the Reserve Bank”. “The standard of living of South African households will not be lifted unless interest rates decline to substantially lower levels – at the very least to the prime rate that existed at the beginning of 2020, namely 10%.”
“Fortunately, the future outlook for the AFHRI is quite positive, due mainly to the prospects for even lower inflation”, says Botha. He points out that the largest single component of consumption expenditure upon which the calculation of inflation is based, namely food and beverages, has only increased by 4.4% over the past year, whilst the welcome decline of more than 100 basis points in South Africa’s long-term bond yield also suggests that a meaningful decline in the repo rate is now overdue.
The MD of Altron FinTech, Johan Gellatly, says: “The South African consumer remains under financial pressure when the results of the latest AFHRI are interrogated. The most worrying aspect is that the pressure is not abating and something has got to give, lowering interest rates would assist in creating an environment that allows SMEs to grow and that would rapidly alleviate the unemployment challenge.
We are continuously striving to provide cost friendly digital transacting products to assist our customers and their consumers to make ends meet. We have recently launched our credit disbursement, NuCash, product to increase financial inclusion and this will become a primary credit disbursement platform. We have provided our customers with data analysis functionality to increase the quality of the consumers they onboard by incorporating data points other than credit bureau inputs. We are working on several initiatives that are all focussed on making it easy for our customers and their consumers to contract with us.”