Junk status: Hard times ahead for consumers
Consumer confidence will take a knock following the downgrade of South Africa's credit rating to junk status by agencies Fitch and Standard & Poor’s (S&P), say analysts.
Leading up to the downgrade, South Africa had been faring well in terms of consumer confidence and was showing signs of improvement. Its ranking among eight emerging countries was at five, according to the emerging consumer survey by Credit Suisse.
The research indicated that the country was heading towards economic growth in 2018, provided it steered a clear path through political, judicial, legislative and credit rating events in 2017. A better economic environment would have resulted in household consumer expenditure growth of over 2%.
Credit Suisse also projected personal finances would improve by 14% and household income would increase by 27% in 2017. It further projected stable inflation, resulting in a boost in major purchases. Overall household balance sheets were expected to recover as more income was allocated to savings.
However, recent political events have overshadowed this, explained FNB economist Mamello Matikinca.
Business confidence will likely take the biggest hit, due to “heightened political uncertainty”. This will result in fixed investment contracting further and ultimately the shedding of jobs.
“Given the events over the last two weeks, most consumers will have a bearish view on the economic outlook,” explained Matikinca. Job losses will impact consumers’ views of their financial position negatively, especially low-skilled workers who are the first to bear the brunt of “economic turmoil”, she said.
Further, the inflation outlook will be impacted by the weakening of the rand. “If the rand depreciates significantly from current levels, it will ultimately feed into higher inflation.” The Reserve Bank will have to increase interest rates, in contrast with expectations earlier this year of a rate cut. “If there were no political turmoil, the rand would have continued to strengthen,” said Matikinca.
Given higher inflation, consumers will then have less disposable income to spend. “Consumers are left with far less money than they would have had a couple of months ago.”
The cost of servicing outstanding debt will also be higher, depending on whether loans are structured on fixed rates or variable rates. “If it’s a variable contract, it means the rate of interest will increase as the repo goes up,” explained Matikinca.
There will also likely be a contraction in the purchase of big ticket items as consumers spend more on essential items instead. “The next couple of months will be challenging for the consumers,” she added.
How to survive junk status
TransUnion CEO Lee Naik shared ways consumers can navigate through the effects of the downgrade. These include making use of customer loyalty programmes and coupons for their purchases. The cost of living is expected to increase so consumers will have to use cost-saving means to manage their disposable income effectively, explained Naik.
He added that consumers should try not to incur more debt. “Avoid falling into the dreaded debt trap… Remember to keep saving month-on-month, and have a solid expenditure plan in place.”
Possible repo rate hikes are likely to filter down, increasing the cost of borrowing. “Consumers should therefore strive to pay off high-interest rate credit facilities first, to minimise the additional debt costs that will be passed onto them by the repo rate hiking cycle,” said Naik. It’s also “smart” to look around for the best interest rate before taking on new debt.
Naik added that consumers should keep up to date with their credit profile and be vigilant of anything that would lead to a negative credit assessment.
He pointed out that consumers could also consider consolidating debt into their home loans. “It’s often easier to pay off one big debt at a low interest rate than many smaller, high-interest debts.
“Abusing this strategy will lead to higher repayment costs in the long term, so you’ll need to maintain financial discipline to avoid racking up the short-term debts again,” said Naik.
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