Debt counselling business, DebtBusters, has reported a 113% increase in debt counselling queries compared to December 2014. Ian Wason, CEO of DebtBusters predicted that the debt situation would get worse as a number of factors come into play in 2016 to stifle consumers’ cash flows.
Factors that may affect consumers’ pockets
Middle and upper income earning individuals may be facing an increasing tax burden, according to Wason, as he believed that no tax relief is in sight and that any tax increases will place consumers in a more financially vulnerable situation.
“Middle and upper income earners are some of the most financially constrained South Africans. They have houses, cars and ample monetary commitments, such as school fees, mobile contracts, etc. These consumers have these possessions because they have borrowed money to make purchases and have already been impacted by two repo rate increases in 2015. Any tax increases will directly impact their level of disposable income and will only make it harder for them to service their financial commitments and/or absorb another repo rate increase,” said Wason.
Furthermore, Wason noted that he expects hikes in the repo rate, as well as increases in the cost of living.
“The recent weakening of the rand, tighter monetary and fiscal policy and the inflationary impact of possibly the worst drought in South Africa’s history, will likely lead to additional hikes in the repo rate at the start of 2016,” stated Wason.
“A repo rate hike after Christmas spending could be the tipping point for many. In addition, consumers can expect their cash flow to be squeezed by other increases; food prices will sky-rocket as a result of the drought, with electricity and water prices expected to increase alongside. The weakening economy and an increased risk of unemployment added to the mix sets the scene for a potentially bleak start to 2016.”
With these increases looming, and Christmas spending possibly blowing consumers’ budget, people may increasingly be looking for loans to help cover their costs and carry them over to the next payday.
However, Wason highlighted that is it becoming more difficult to get a loan.
According to Wason, the interest rate caps introduced in November 2015 will make it more difficult for borrowers to obtain loans in the future.
“While low risk consumers will be paying less in interest and fees, lenders will be using more stringent risk models to evaluate customers’ creditworthiness. As soon as the new limitations on fees and interest rates regulations come into effect (May 2016), lenders will be taking on more risk for less money and are therefore bound to decline riskier borrowers. As lenders start scaling back on who they lend money to, even fewer people will qualify for loans, and consumers who are dependent on short-term loans for survival will find themselves in a “cash flow drought” with nowhere left to turn,” explained Wason.
South Africa’s increasing debt costs
In addition to the challenges that consumers may be facing this year, a recent report by Standard & Poor’s (S&P) rating agency suggested that sub-Saharan African countries, of which South Africa is a part, may be facing increasing debt costs within the next few years.
According to S&P, over the past few years sub-Saharan Africa countries “have enjoyed unusually favourable financing conditions.” However, they now believe that “the tide has turned” and that these sovereigns will be spending an increasing amount of their revenue on servicing their debt over the next three years.
“The effective management of these changes will pose difficult policy choices for African governments. We see two groups of factors--global and domestic--that contribute to our expectation of higher government interest expenditures,” revealed S&P.
One of the global factors to affect these countries (including South Africa) is the depreciation of the local currencies. According to the Automobile Association of South Africa (AA), during the course of 2015 the Rand lost almost one-third of its value against the US dollar. This depreciation of the currency has inflated foreign currency debt for many sub-Saharan African countries.
An increase in the interest rate has resulted in the increasing of domestic borrowing costs. “We anticipate that the continued tightening of global liquidity conditions (with a U.S. Federal Reserve rate hike announced in December 2015) will also raise the future refinancing cost of U.S. dollar-denominated commercial debt,” said S&P.
S&P projected that over the next three years budgetary performance in these countries will deteriorate, which will keep debt elevated.
“As a result, we think many SSA sovereigns will face difficult policy choices in the coming years, weighing front-loaded fiscal consolidation against elevated future debt levels and increasing interest expenditures. These anticipated developments are already largely incorporated in our SSA sovereign ratings, which are forward-looking assessments of creditworthiness. We have lowered a number of ratings in the region over the past two years,” highlighted S&P.
In December 2015, S&P changed its outlook for South Africa from positive to negative, with a BBB rating, which is one step above junk status. If the country reaches junk status, foreign investors may be unable to invest in the country.
“Both Fitch and S&P alluded to the likelihood of lower potential growth going forward, particularly as a lack of policy implementation to address SA’s structural problems continues to inhibit higher potential growth in a muted commodity price environment,” revealed MMI Holdings in December following the credit downgrade by S&P and other ratings agencies.
S&P except South Africa’s fiscal performance to improve, however, with the likely increase in the country’s debt costs, consumers need to be financially savvy in 2016 to avoid increasing their debt costs.
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