South African households would have gained R200 billion more to spend since 2022 of the SA Reserve Bank had adopted a less restrictive monetary stance which would have kept the household debt cost and disposable income ratio stable, economist Dr Roelof Botha said Thursday.
To provide an indication of what a big impact this would have been, consider that the Two Pot Pension payouts towards the end of last year injected R50 billion of additional spending on the economy, and economic data already shows that this lifted retail spending.
Interviewed at the release of the Altron FinTech Household Resilience Index (AFHRI) on Thursday, he said: “The extent of the loss of purchasing power among households is alarming. It is obvious the restrictive monetary policy stance of the Reserve Bank’s Monetary Policy Committee (MPC) has come at a substantial cost to the economy.”
The real value of the Altron household credit extension declined by more than R20bn between the third quarter of 2023 and the third quarter of 2024.
“It is simply not possible for the economy to grow at a meaningful rate unless credit extension is rising in real terms,” he said.
The AFHRI shows the financial pressure faced by households continued into the third quarter, mainly due to the high interest rates over the past three years, which has left the average debt cost burden of households at its highest level in 15 years.
According to Dr Botha, who compiles the index on behalf of Altron FinTech, the recent lowering of the repo rate has exerted a marginal positive impact on the AFHRI, with the year-on-year increase of 2.1% overshadowed by zero growth in the ratio of household income to debt.
Another worrying trend in the AFHRI is that the ratio of household income to debt costs is almost 9% lower than in the first quarter of 2020 (pre-COVID).
“It is a pity the MPC seems to have overplayed its hand in attempting to tackle an inflation problem that was never caused by excessive demand in the economy, but rather by the massive increases in energy costs and global freight shipping charges due to the COVID lockdowns,” said Botha.
He said in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs. This ratio has since increased by 36%, with households now spending 9.1% of their disposable incomes on servicing debt.
South Africa’s prime rate was 7% at the end of 2021, but jumped to 11.75% in May 2023, where it stayed for 16 consecutive months.
“At an annualised rate of merely 3%, consumer inflation is now at the bottom of the Reserve Bank’s inflation target range of 3% to 6% and the MPC is running out of reasons to maintain its overly restrictive monetary policy stance,” he said.
The real prime rate (prime minus inflation) now stands at 8.3% – one of the highest commercial lending rates in the world.
“What is even more perplexing, from the perspective of the quest for higher economic growth, is the real prime rate stood at 5% at the beginning of 2020 (prior to the pandemic), which means the real cost of credit and of capital in South Africa has increased by 66%. Hopefully, the MPC will lower rates further early in 2025,” said Dr Botha.
He suggested that the Reserve Bank’s MPC should be reconstituted, from political appointments to being more representative of the views of economists.
Dr Botha said, for instance, that South Africa’s residential property market has taken a severe knock as a result of record high interest rates, with the value of building plans passed having declined by 20% in real terms over three years.
In another example of the impact of high interest rates on the economy, he said the manufacturing sector, capacity utilisation has not yet recovered to pre-COVID levels and demand has been dampened so much, that manufacturers are having to increase unit costs, just to continue producing, which means that the MPC’s high interest rate stance has begun to fuel inflation, he said.