Cape Town - South African households in the middle to higher income groups are saddled with debt.
The higher income groups' debt burden was already so bad in the first quarter of this year that people in this group had to use on average nearly two thirds of their disposable income for the repayment of their debt.
And the middle income group is not far behind.
The danger that they could lose assets bought on credit such as houses, cars and furniture in the event of interest rates rising further is great, because they cannot repay their debt.
Indeed, analysts reckon after the hike in interest rates two weeks that some won't be in a position to meet their debt commitment; and the bad news is that another rate hike is possible.
Bad debt could hit growth and jobs
If a flurry of bad debt sparks off, it could translate into lower than expected economic growth and job creation.
Economists have for some time warned that higher economic growth (hovering around 5%) experienced over the past two years has been built by consumers who have taken on debt they can no longer afford (thanks to interest-rate hikes) in order to live above their means
The most recent Quarterly Bulletin released by the SA Reserve Bank on June 21, 2007, showed that household debt had worsened in the first quarter; if households accumulate debt at the same rate over the rest of the year as they did in the first quarter, then households will owe an average of 75.9% of their disposable income. This figure stood at 71.8% for the same period last year, and at 63.5% in 2005.
These indicators are just averages and don't reflect the high debt levels of high- and middle-income groups.
Professor Carel van Aardt from Unisa's Bureau for Market Research, says high-income households (whose annual income exceeds R300 000 a year) are deeply indebted.
The middle-income group - whose annual income exceeds R100 000 - is not far behind.
Drowning in debt
Calculations show that in the first quarter of 2007, those who earned more than R300 000 a year owed an average of 108.4% of their disposable income. That's 91% higher than five quarters ago.
A similar relationship exists in households that earn more than R100 000 a year; in this bracket, debt consumed 91% of their disposable income, compared with 81% five quarters before.
Van Aardt's analysis, which has been undertaken on behalf credit-granting institutions, shows that ever-larger chunks of households' disposable income are going towards servicing debt.
Those who earn more than R300 000 a year already spend an average of 62% of their disposable income on paying off debts.
Van Aardt says households' debt levels have crept up as they now owe various banks (instead of one a decade or so ago), while they have also obtained credit cards from various retailers.
This situation has arisen as one institution does not necessarily know about the debt owed to other institutions.
The National Credit Act could bring about an end to the situation now that all credit providers have to log all debt held by individuals in a national loans register in order to determine how much that person owes.
This could prevent people from taking on credit they cannot afford in future.
Johann van Tonder is an economist with Dynamic Wealth