Storm clouds gather over South Africa’s consumers
South Africans, it seems, just can't stop spending.
Roads in Johannesburg, Cape Town and Durban are jam-packed with more BMWs, Mercedes Benz and even Ferraris than you can shake a gearstick at.
The country’s ubiquitous malls are filled with shoppers laden with enough bags to give Paris Hilton buyer’s remorse.
The data behind the anecdotes of bling tell the same tale: consumer spending has increased every quarter since 2009.
Retail sales have been wobbly since the global meltdown, but have jumped 3.8 percent in the last year.
Yet all is not well among the great South African spending public.
Consumers, it seems, are increasingly borrowing to survive — and often to pay for conspicuously ostentatious lifestyles — creating what many worry is a time bomb for Africa’s largest economy.
Johannesburg nurse Celia Mondi, 40, is one of those borrowing just to make ends meet.
“My savings have been depleted. I have no choice but to borrow to afford basic needs,” she said.
“Almost my entire pay check goes towards repayments of credit cards, loans and insurance,” said the single mother of two. “Cash is scarce.”
The fact that people like Mondi are struggling has economists and policymakers worried.
That is because she is part of the black middle class — dubbed “Black Diamonds” — that have been a pillar of the South African economy since the end of apartheid in 1994.
Reaping the benefits of the “Rainbow Nation”, Mondi and others obtained an economic standing that was impossible before apartheid was finally thrown aside in 1994.
That meant access to mortgages, vehicle finance and many other forms of credit.
But there are ominous signs the party appears to be coming to an end.
According to the National Credit Regulator, there were 12 percent more applications for credit in December 2012 than September of the same year.
Unsecured loans, with high interest rates, now make the bulk of applications.
A fifth of credit-active consumers are failing behind in repayments by at least three months.
Economist John Loos says households’ debt-to-disposable income ratio stands at 76 percent.
And the health of the broader economy is not helping.
Increased food, electricity and transport costs are eating further into already shredded pocketbooks.
Inflation for March stood at 5.9 percent.
Economists predict that inflation will breach six percent in the third quarter, with no relief in sight.
To add to consumers’ woes the national energy regulator plans an eight percent electricity tariff hike over the next five years.
The increase put an end to years of cheap electricity.
Prices have also been pushed upward by a weakening of the rand, which has made imports more expensive.
According to Loos, hiking interest rates, currently at 5.0 percent, could reduce household spending.
“Arguably the most effective way to curb overall household borrowing growth is to hike interest rates,” said a report by Loos.
But with the economy growing at a modest 2.8 percent — well below the levels of other emerging economies — and unemployment hovering at 25 percent, the room to raise rates is negligeable.
South Africans looking for a used BMW, Mercedes Benz or Ferrari may want to head to their nearest repossession auction — so long as they have the cash.