Household debt animal not tamed yet - analysts
August 22, 2008
By Ethel Hazelhurst
Johannesburg - While the recent build-up of debt in South African households is alarming, there is no way of knowing how much worse it will get.
Nor do policy makers know whether overindebtedness will reach a point where debt defaults will threaten the financial system.
Andre Bezuidenhout, the Reserve Bank's head of the financial stability department, made these points at a recent workshop on overindebtedness. The workshop was organised by the FinMark Trust.
Policy makers' dilemma is that there is no clear sign that a tipping point is approaching.
Bezuidenhout said "only hindsight will tell", particularly in view of the "many structural changes", which made historic data "less than ideal for predicting the future".
Structural changes included "the addition of a whole new borrowing class as a result of economic empowerment".
Bezuidenhout said that, at this stage, it was impossible to tell whether debt had "gone beyond what is good for the economy". He pointed out that there "is a massive opportunity cost associated with a premature halt to a growing credit cycle".
He was referring to the fact that rising interest rates slowed economic growth and might even plunge the economy into recession - two quarters or more of shrinkage in the economy.
However, he highlighted the dangers of growing debt levels.
Households are using 11 percent of disposable income to pay interest on debt, a ratio Bezuidenhout describes as "alarming".
He said growth in household net wealth had slowed from 24.4 percent in the second quarter of last year to 5.8 percent in the first quarter of this year. Net wealth represents household assets and financial assets minus debt.
Household stresses are reflected in banks' balance sheets. Banks' impaired advances (bad debts) are "growing quite disturbingly", according to Bezuidenhout, from 1.99 percent of total advances at the beginning of the year to 2.27 percent in April.
He pointed out that when too many people could not afford to pay interest on their debt, the whole economy was vulnerable. In this environment, one interest rate hike could trigger debt defaults, sending successive defaults cascading through the financial system.
According to him, in this situation even those who have not overextended themselves are in danger "and the macroeconomic costs are substantial".
Bezuidenhout called for "open sharing of data" to ensure that regulators, borrowers and lenders had "comprehensive and timely data" on which to base their decisions.
Marlene Heymans, an independent consultant, presented findings of research on behalf of the FinMark Trust on early indicators - signs that could help lenders and policy makers to recognise looming problems.
Early warning signs included behavioural patterns of financially distressed consumers, which she "gleaned from discussions with debt counsellors and from an analysis of data of a small sample of debt counselling cases".
In the first phase, she said: "Borrowers use all available credit card and overdraft facilities and draw on their mortgage facilities or obtain a second bond. They use up savings, withdraw money market investments and sell shares. They borrow from family and microlenders and explore consolidation options if they have fixed property for security."
This behaviour is largely reflected in banks' credit figures and in surveys of consumer behaviour.
In the second phase, borrowers "start defaulting on debt, are erratic about paying municipal services and rent, miss premiums on insurance policies or surrender them, fall behind in school fee payments, cellphone and store accounts and then start pawning jewellery and electronic goods".
In the third phase, people fall behind on car and mortgage payments and may make arrangements to reschedule loans or ask for help from a debt counsellor.
Finally, they are forced to sell possessions and may face debt judgments, for which data is available from banks as well as in court.
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