Safari into consumer credit

Financial health of the SA consumerPersonal Finance Research UnitUNISA

15 October 2014Kloofzicht Lodge

Overview

• Macroeconomic environment.• Total income from work – on the macro level.

How much more are workers receiving?

• Distributional/micro level individual income analysis.Actual “cash flow” income – inequality.

• Distributional credit/debt analysis.Debt to actual “cash flow” income.Debt service costs to actual “cash flow” income.

• Household consumption expenditure.Structural or cyclical shifts.

Macroeconomic environment not favourable

2011 2012 2013 2014 World economic growth rate 3.9 3.2 ↓ 3.0 ↓ ↔ SA economic growth rate 3.6 2.5 ↓ 1.9 ↓ ↓ CPI rate 5.0 5.6 ↑ 5.8 ↑ ↑ Unemployment rate 35.6 35.6 ↔ 35.3 ↓ ↑ Not economically active rate 34.9 34.5 ↓ 34.0 ↓ ↑ Employed 14.1 million 14.4 million ↑ 14.9 million ↑ ↑ Grant recipients 15.0 million 16.0 million ↑ 15.6 million ↓ ↑ Prime lending rate (year end) 9.0 8.5 ↓ 8.5 ↔ ↑ JSE All Share Index 31 985.67 39 250.24 ↑ 46 256.23 ↑ ↑? Rand/US$ (year end) R8.40 R8.46 ↑ R10.44 ↑ ↑

Impact on income from work (employees)

• Approximately 55% - 60% of nominal household income in 2013.

• Two sources:• Gross earnings (Quarterly employment statistics - QES).

Formal sector only, excluding agriculture.

• Compensation of employees (Gross domestic product – GDP). All formal and informal sectors.

Income from work > CPI target(Nominal Year over Year % change)

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q20

2

4

6

8

10

12

14

Compensation of employees: YoY % change Gross earnings in formal sector ex agriculture: YoY % change

But can they purchase the same volumes?

Real income from work per worker YoY % change

2011

Q1

2011

Q2

2011

Q3

2011

Q4

2012

Q1

2012

Q2

2012

Q3

2012

Q4

2013

Q1

2013

Q2

2013

Q3

2013

Q4

2014

Q1

2014

Q2

-3

-2

-1

0

1

2

3

4

5

6

Real Compensation of employees per worker: YoY % changeReal Gross earnings per worker in formal sector ex agriculture: YoY % change

Percentage of annual income by income group

R0-R6 000R6 001-R35 000

R35 001-R84 500

R84 501-R182 500

R182 501-R318 000

R318 001-R600 000

R600 001-R1 200 000

R1 200 001+

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

22.5

2011 2012 2013

Distribution of income

Top 1% R753 991 and above 21.46% of Income

Top 20% R70 273 and above 84.85% of Income

Bottom 60% R0 to R25 300 3.51% of Income

Household income and debt

Calculating debt to income• Not easy task.• Two different methods yield two very different answers.• Highly dependent on the definition of income.• Government grants;• Government transfers;• Imputed rent;• Adjustment in the reserves of households in retirement funds.

Debt to income ratio (2 methods)

0 - 42 000

42 001 - 50 000

50 001 - 66 000

66 001 - 90 000

90 001 - 105 000

105 001 - 120 000

120 001 - 180 000

180 001 - 325 000

325 001 - 600 500

600 5001 - 1 215 000

1 215 000+

0 50 100 150 200 250

Debt to income (M2) Debt to income (M1)

Debt service cost to income ratio (2 methods)

0 - 42 000

42 001 - 50 000

50 001 - 66 000

66 001 - 90 000

90 001 - 105 000

105 001 - 120 000

120 001 - 180 000

180 001 - 325 000

325 001 - 600 500

600 5001 - 1 215 000

1 215 000+

0 5 10 15 20 25 30 35 40 45 50

Debt service costs to income (M2) Debt service costs to income (M1)

Low income groups pay proportionally more debt service costs (M2)

0 - 180 000 180 001 - 325 000

325 001 - 600 500

600 5001 - 1 215 000 1 215 000+

0

5

10

15

20

25

30

35

40

45

% of debt % of debt service costs

Distribution of personal income tax (PIT), 2012

0 - 70 000

70 001 - 120 000

120 001 - 150 000

150 000 - 750 000

750 001 - 1 000 000

1 000 000+0%

10%

20%

30%

40%

50%

60%

70%

% of individual taxpayers % of PIT paid

Interest rate increases• Increase of 2 percentage points by end 2015 should increase debt service costs

by R60 billion – conservative assumptions.• Some 31% of individuals (in the mentioned five middle to low income groups in

M2) with 5.35% of debt and 9.5% of debt service costs will be hit hard.• However, according to M2 the highest indebted four groups, but especially the

R180 000 to R325 000 will find it increasingly difficult to afford their expenditure and savings.

• M1 suggests that the R600 000 to R1.215 million is the highest indebted.• Nevertheless, interest rate increases will affect consumption expenditure- and

economic growth negatively.• Current interest rate legislation increases the debt service cost on the “poor”

disproportionally.

Household consumption expenditureStructural or cyclical shifts?

• Continuous interplay between structural and cyclical movements.

• Assess structural or cyclical changes – number of methods.

• However, need to be confirmed by other tests.

Structural or cyclical?

Since 2011 Volumes > Value (% of total) % of total

Furniture and appliances Yes 2.07 Personal transport Yes 5.99 Communication equipment, boats and planes, TV’s etc. Yes 2.66 Jewellery, watches, therapeutic appliances Yes 0.88 Computers and equipment Yes 0.55 Clothing and footwear Yes 7.35 Textiles furnishings and glassware Yes 1.82 Motor tyres parts accessories Sport and camping equipment, books, toys, hobbies Yes 0.97 Electrical personal care appliances and personal effects Yes 0.48 Food beverages tobacco Household power and water Consumer goods Yes 3.88 Medical and pharmaceutical products Petroleum products 2.95 Newspapers, magazines, stationary, recording media Housing, Rent (including imputed rent), services HH Services including domestic servants Medical services Yes 7.38 Transport and communication Yes 10.03 Cinema and other entrance fees, cable TV-subscription, etc. Services Miscellaneous Security services Yes 0.46

T-distribution: 95% confidence (V = Volumes; P = Price) Structural shift: 2002 - 2007

Current: Since 2011

Structural shift: Since 2011

% of total(Volumes)

Furniture and appliances 2004-2007 Yes No Personal transport 2004-2006 Yes No Communications, photographic, audio-visual etc. 2004-2008 No Yes (V) 2.66 Jewellery, watches, therapeutic appliances 2005-2008 No Yes (V) 0.88 Computers and equipment 2007 No Yes (V) 0.55 Clothing and footwear 2002-2007 Yes No Textiles furnishings and glassware 2003-2006 Yes No Motor tyres parts accessories 2004-2006 Yes No Sport and camping equipment, books, toys, hobbies 2005-2007 Yes No Electrical personal care appliances and personal effects No Yes No Food beverages tobacco 2004-2007 Yes No Household power and water No No Yes (P) 2.69 Consumer goods 2006-2007 Yes No Medical and pharmaceutical products 2007-2008 No Yes (V) 1.83 Petroleum products 2009-2011 No Yes (P) 2.95 Newspapers, magazines, stationary, recording media 2005-2007 Yes No Rent (including imputed rent) 2005-2008 Yes No HH Services including domestic servants 2006-2007 Yes No Medical services No Yes Yes (P) 7.38 Transport and communication No Yes No Cinema-, other entrance fees, cable TV-subscription, etc. No Yes No Services Miscellaneous No Yes No Security services 2001-2003 No Yes (V,P) 0.46

Households’ contribution to structural spending, 2013

R0-R25 000

R25 001-R50 000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

Jewellery, watches, therapeutic appliances 2013

R0-R25 000

R25 001-R50

000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Computers & related equipment 2013

R0-R25 000

R25 001-R50 000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Medical Services 2013

R0-R25 000

R25 001-R50 000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

% of households

Households’ contribution to structural spending, 2013

R0-R25 000

R25 001-R50 000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

HH Power & water 2013

R0-R25 000

R25 001-R50 000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

Medical & pharmaceutical products 2013

R0-R25 000

R25 001-R50

000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Security services 2013

R0-R25 000

R25 001-R50

000

R50 001-R100 000

R100 001-R200 000

R200 001-R400 000

R400 001-R600 000

R600 001-

R1000 000

R1 000 001+

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

% of households

• Structural spending in some 20% of household consumption expenditure item

groups.

• Approximately 12% due to price and 8% as a result of volumes.

• In volume terms – durable goods, security mostly purchased by high income

households.

• In volume and price terms – housing and medical services mostly purchased by

R200 000 – R400 000 group.

• Downward cyclical movement in most other goods and services.

Structural or cyclical?

• Stats SA (CPI, QES, QLFS, GDP).

• South African Reserve Bank (Quarterly Bulletin, BA 900, Interest rates).

• National Treasury (Budget Review).

• South African Revenue Services (Tax Statistics).

• JSE (Statistics).

• Momentum/Unisa Household Financial Wellness Index, 2013.

• Bureau of Market Research at Unisa (Database and Research Reports).

• International Monetary Fund (World Economic Outlook).

• National Credit Regulator (Consumer Credit Reports).

• Own calculations.

Sources

Thank you!