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Consumers squeezed to the max this year - debt expert

Jan 11 2016 12:45
Carin Smith

Cape Town - The continuous drought, the likelihood of an electricity price hike and the probability of a tax increase early this year is going to squeeze consumers to the maximum, according to Neil Roets of Debt Rescue.

He said the depreciation of the rand will increase the woes of severely strained consumers during the early part of 2016, when the impact will be seen on imported goods.

“Unemployment is at over 25.5% and the matric class of 2015 will add more job seekers to the job market. Add to this the speculation of a few potential interest rate hikes, and the outlook for 2016 is dire,” Roets said on Monday.

National Credit Regulator (NCR) statistics show that just slightly less than 50% of all credit-active consumers are over-indebted, meaning they are in arrears by three months or more on at least one of their accounts. Debt Rescue statistics indicate that there has been a dramatic spike in the number of applications for debt review between 2014 and 2015, with 182% growth year-on-year. More men are applying for debt review than women.

These figures also show what Roets calls a phenomenal increase of 214% in young people between 21 and 25 years of age applying for debt review. In his view, this because the youth are not financially educated on how to deal with debt and tend to overspend - usually on luxuries.

READ: Brian Kantor: Zuma blunders now priced into SA assets as a permanent danger

Momentum economist Sanisha Packirisamy expects challenging growth conditions to persist against a backdrop of sluggish global trade activity, although the growth slowdown in emerging markets has decelerated since the start of 2015.

"This is due to lower demand, onshoring and a China slowdown driving commodity prices weaker, and slowing growth in domestic demand, in the absence of further significant support from monetary and fiscal policy," she said.

In addition, rising interest rate prospects for the US pose tighter monetary conditions for emerging economies, particularly those running extended current account deficits.

"While potential currency weakness may partly negate the effect of declining portfolio flows through rising domestic interest rates, a weak growth backdrop may limit the extent of emerging market rate hikes while higher inflation could push real rates lower," she added.

Ratings agencies, including Fitch and Standard and Poor’s, have warned that South Africa’s bonds could be reduced to junk status if the economy does not improve.

"Should this happen, it would lead to an inevitable interest rate increase which would have a severe impact on deeply indebted consumers,” warned Roets.

"Averting a sovereign debt downgrade to junk status is still an attainable goal. If government commits to reducing the bloated public sector wage bill by constraining employment additions, curbing wasteful expenditure through cracking down on corruption and dedicating resources to reduce maladministration in South Africa’s state-owned corporations, the trajectory of structural expenditure will improve," said Packirisamy.

"Acting on a number of proposed economic reforms, in the labour and product markets in particular, will cultivate higher rates of economic growth, allowing SA to grow its way out of a potential debt crisis, even in the absence of another commodity super-cycle."

Roets pointed out that South Africans are the biggest borrowers in the world, according to a recent World Bank survey, and that 10.26 million people have accounts that are three months in arrears, according to the NCR.

READ: South Africans world’s top borrowers

Credit Ombudsman Nicky Lala Mohan said the World Bank survey showed that South Africans had more debt than any other nation. According to the World Bank, 86% of South Africans have debt, followed by the Iranians at 71%.

Roets cautioned it is imperative for consumers to draft a budget and stick to it to live within their means.

ALSO READ: Outlook for SA consumers dire, debt experts warn

debt rescue  |  neil roets  |  sa economy  |  consumers  |  debt
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