South Africa’s household liabilities increased at a significantly slower pace of 3.2%, during the first quarter of 2013 helping to maintain wealth creation to remain in the positive territory, according to the latest Momentum/UNISA Wealth Report.
Released last week, the Momentum/UNISA Q1 2013 Wealth Report came amid increasing concern about the level of indebtedness in South Africa. The 3.2% increase in household liabilities recorded for the first quarter of 2013 compares to 24.9% of the fourth quarter of 2012.
The report noted that South African households experienced a sharp decline in the pace at which their net wealth was growing in the first quarter of 2013. The Momentum/UNISA South African household wealth index increased 2.9% in the first quarter of 2013 compared to an increase of 14.3% in fourth quarter of 2012. “The much slower increase in the value of household net wealth can be attributed to a sharp deceleration in the pace at which household assets increased. Had it not been for a similar slowdown in the growth tempo of household liabilities, the value of household wealth may have stagnated in Q1 2013”.
The report said South African household wealth is estimated to have increased from R6 282 billion in Q4 2012 to R6 373 billion in Q1 2013.
The report said the ratio of household assets to household liabilities remained unchanged at 5.2 times during
Q1 2013, whilst the ratio of household net wealth to disposable income increased slightly to 317.2 in Q1 2013 from 316.6 in Q4 2012.
The slower growth of household’s net wealth also reflects the general state of the economy. The report noted that during the first quarter of 2013 production in the South African economy was hampered by the usual suspects. It listed slow international demand and domestic structural deficiencies such as the shortage of electricity. It also listed “many self-inflicted wounds” including wage related labour strikes which ensured that production growth remained below the country’s economic growth potential.
The report also noted that consumer finances remained under pressure as a result of price increases. “Consumer price inflation (CPI) increased from 5.7% in Q4 2012 to 5.9% at the end of Q1 2013. Strong increases in the petrol price (16.4% on a YoY basis), medical scheme contributions (10.5%) and in the price of education (9%) contributed to the increase in the CPI. Although weak demand may limit the increase in the CPI, cost pressures emanating from wage demands, administered prices and the weaker rand may cause the CPI to breach the upper bound of the inflation target (6%) later this year”.
The report said while the weaker growth in net household wealth is understandable given the mediocre international economic performance and lack of economic progress on the domestic front, analysis reveals that the nominal quarter on quarter increase in household wealth was caused by nominal household assets increasing faster than household liabilities. “Household assets increased 5.4% and household liabilities 3.2% during Q1 2013 (compared to Q4 2012)”.
Given the above mentioned small increases, households’ solvency ratio (household assets to household liabilities) remained virtually unchanged at 5.17 in Q1 2013 compared to 5.15 in Q4 2012”.
There have been fears that unbridled unsecured lending seen in the past few years may cause a financial crisis. These fears are best represented in commentaries attached to financial statements of major corporations. The latest in the string of these statements came from Sanlam last week. Releasing its results for the six months ended June, Sanlam said “Recent labour unrest in South Africa and concerns around a potential unsecured credit bubble added to international investors cautious approach”.
Players in the unsecured debt market have indicated that they were pulling back from yesteryear’s aggression. This may have influenced the easing in household liabilities as noted in the latest Momentum/UNISA Wealth Report.
The report noted that “Although the pace of household liabilities growth slowed, household debt service costs increased from 9.8% in Q4 2012 to 10.9% in Q1 2013 – notwithstanding the prime rate remaining unchanged. This can be ascribed to higher average interest rates charged by banks (especially on non-mortgage and non-secured debt types) and the growth in household liabilities”.
The report also noted that the pace at which households increased their consumption expenditure slowed from 15.66% in the fourth quarter of 2012 to 5.36% in first quarter of 2013. “Some reasons for this slowing can be found in affordability considerations. For instance, the slower growth in household income, which in turn was affected by an increase in the unemployment rate during Q1 2013 contributed to consumers reigning in some discretionary expenditure”.