Another tough year looms
Consumers face nine more montsh of painfully high debt costs, warns fund manager
January 24, 2008
By Tonny Mafu
Johannesburg - Consumers are set to endure another nine months of tough economic conditions, with the cost of debt already 40 percent higher than in 2006, according to Anil Thakersee, the managing director of unit trusts at Old Mutual Investment Group South Africa (Omigsa).
After more than four years of a benign economic environment, in which credit became cheaper, consumers face a potentially crippling situation. Rising inflation has eroded the purchasing power of disposable income. The Reserve Bank has increased interest rates by 400 basis points since June 2006 to keep inflation under control, but price increases breached the upper limit of the bank's 3 percent to 6 percent target band in April last year, and have remained above this level since.
Household debt is almost 80 percent of disposable income and debt servicing (interest) costs have risen to about 10 percent of income.
Retail sales grew by a modest 0.2 percent in November after rising only 1.5 percent in the previous month.
Thakersee said there were significant signs that consumers would continue to experience difficulties for six to nine months. Inflation would reach its peak during the first two months of this year.
Economists have forecast that the inflation rate on the consumer price index excluding mortgages (CPIX) would top 8 percent. CPIX rose 7.9 percent in November, fuelled by food and oil prices. But some analysts have forecast a softer landing for consumers.
In its outlook, Citigroup said it expected real disposable household income to continue growing by between 4 percent and 4.5 percent this year and next year. It forecast that food and energy prices would return to the target range, along with other CPIX basket components.
Omigsa has said that despite the strain on consumers, debt default statistics still looked benign.
Luke Doig, a senior economist at Credit Guarantee, is not convinced by official insolvency data. "Despite seven interest rate hikes (at that stage), debt judgments in November were 31.8 percent lower in value. [They were] 10.7 percent down in the first 11 months of the year."The credit insurer expected debt defaults to worsen by 30 percent this year, with 10 percent more firms failing to open for business as a result.
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