Gina Schoeman of Macquarie First South warns that with last year's interest rate
hikes and tighter monetary policy conditions, the effects may slow the
purchasing power of individuals during 2008.
The silly season has come and gone and we move into 2008 with slight
apprehension for what the year may hold. 2007 left the consumer with some
nervous conditions for those teetering on the brink of over-indebtedness. Add to
this an 8-12 month lag that it takes for interest rates to really influence the
markets, and it is no wonder that the next few months are going to be tight.
During 2007 the prime interest rate increased by 200bps; this means that between
January 2007 and December 2007 rates moved up from 12.5% to 14.5%. The result is
that a larger proportion of disposable income is set against interest payments
on various credit facilities, leaving less available to spend. The table below
lists just some of the basic credit lines that South Africans are able to
qualify for, and end up adding to their monthly budgeting process. What I'm
getting to here is that if the average South African consumer holds only a
mortgage and vehicle loan equivalent to the average price of these assets, he or
she lands up already owing about R1.2 million before interest payments even
began to kick in. And, we haven't even mentioned what may be owed on credit
cards and retail credit facilities.
Retail sales slowed to a 4-year low in November 2006, emphasising the fact that
as people spend more on interest repayments, they have less available for much
else. We expect retail sales to continue its slowdown throughout the first half
of 2008.
It's important to keep in mind that the proportion of our population directly
influenced by changes in interest rates is very small in comparison to the
total. In fact, when we have a look at the different LSM (Living Standards
Measure) groups, it is obvious that other than retail store credit, it is only
from an average monthly earnings of approximately R4500 that credit begins to
rear it's head. However, the strongest level of purchasing power comes from
these higher LSM levels and so, the health of their personal balance sheets is
critical.
What does all of this mean? As interest rate increases from 2007 continue to
feed through to the economy, consumers in South Africa may feel their belts
being squeezed tighter. Although interest rates are generally expected to remain
somewhat stable during 2008, the effect of tighter monetary policy conditions
during 2007 may slow the purchasing power of individuals during the year.