Time to Get Serious...Tighten Those Belts

Private Property South Africa
Gina Schoeman

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.

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