Higher interest rates, offsetting the gains made in the post-Covid-19 recovery period, continue to weigh on South African households’ finances, and could dampen spending during Black Friday sales and the Festive Season, the latest Altron FinTech Household Resilience Index (AFHRI) shows.

Since the onset of restrictive monetary policy in South Africa, the financial resilience of households has been under pressure, with a strong and predictable inverse correlation between higher interest rates and the AFHRI trend, explained economist Dr Roelof Botha, who compiled the index.

The second quarter 2023 index reveals that 11 of the 20 constituent indicators of the AFHRI have declined year-on-year and nine have declined since the last comparable quarter before the Covid-19 pandemic.

This does not bode well for consumers to spend excessively in the run-up to one of the key events in the retail sector, Black Friday, said Altron FinTech MD Johan Gellatly, further pointing to the potential of a “bleak” Christmas for retailers across the board, with households now “very clearly” under severe strain, especially those in the lower income brackets.

“The gains made in the post-Covid-19 recovery period have now been wiped out by the highest interest rates in 15 years, with the current real prime overdraft rate – prime minus the consumer price index (CPI) – at a level of 7%, more than double the average rate that existed during the tenure of previous South African Reserve Bank (SARB) Governor Gill Marcus,” Botha noted.

He suggested that SARB’s overly hawkish policy approach to raise interest rates to higher levels than before the pandemic was not based on any signs of demand inflation in the economy, adding that during 2022 and the start of 2023, the lingering effects of higher fuel prices, record increases in global freight shipping charges and an unusually strong US dollar were primarily responsible for higher inflation all over the world, including South Africa.

“Despite inflation having moved to a comfortable level of close to the mid-point of the SARB’s target range of 3% to 6%, the Monetary Policy Committee’s insistence on maintaining a real prime rate of 7% defies logic, as this rate is now 126% higher than the average real prime rate that existed in 2014.”

“From an analysis of the relationship between gross domestic product growth, inflation and the short-term interest rate, it is clear that the South African economy requires a real prime rate of below 5% to be able to grow at a meaningful rate.”

Discussing the outcomes of the Index, Botha said that the AFHRI increased marginally from 108.6 during the first quarter of 2023 to a value of 109 during the second quarter of 2023, with no change recorded year-on-year.

“With a base level of 100 for the inception period of the index during the first quarter of 2014, this means that the average household’s financial disposition has improved by only 9% in real terms over a period of more than nine years.

“Since 2014, the average yearly improvement in the index is less than 1%, which serves as a clear indication of the economy’s underperformance, mainly because of low investor and business confidence resulting from State capture and the erosion of the efficiency of infrastructure. Over the past 18 months, this has been exacerbated by the negative effects of a sharp increase in the cost of credit,” Botha explained.

Restrictive monetary policy by the SARB since the end of 2021 has raised the cost of credit, and of capital, by 68%, measured against the prime overdraft rate.

Meanwhile, without the increase in employment in both the private and public sectors, which represented one of the bright spots in the second quarter AFHRI, the downward trend in the financial resilience of households would have been more pronounced.

“The upward trend in new job creation continued in the second quarter of 2023, with 154 000 new jobs having been created between April and June according to the Quarterly Labour Force Survey by Statistics South Africa. Unfortunately, the momentum diminished during 2023, with 412 000 new jobs in the first half of the year, compared with more than a million in the first half of 2022,” Botha pointed out.

In addition, the positive employment effect was not matched by total remuneration levels in the private sector, which weighed on the AFHRI given the declining year-on-year trend and high weighting among the composite indicators of the Index.

While the average monthly remuneration in South Africa was virtually unchanged over the past four quarters, at R15 863 in nominal terms, it declined by 5% in real terms, deflated by the CPI.

Another negative indicator is the sharp increase in the ratio of debt costs to household income, which is a point of huge concern.

“On the average value of mortgage bonds administered by BetterBond, homeowners are now paying about R4 800 more a month than at the end of 2021,” Botha commented.

Further, the value of surrenders of long-term insurance policies is declining, registering nearly 6% lower year-on-year during the second quarter of 2023 and almost 20% lower than at the start of 2019 in real terms.

“[However,] the year-on-year increase in the value of short-term insurance premiums of more than 8% is an indication of a degree of resilience in the economy, as this indicator is positively correlated to the acquisition of assets, many of which are used as productive economic capital.