The first quarter Altron FinTech Household Resilience Index (AFHRI) is in “stable territory” with a consistent improvement in the disposable income of South African households and their ability to pay back debt.

However, while the ratio of household income to debt costs has improved considerably since 2019, a negative reading has been recorded since the fourth quarter of last year, and increasing interest rates could weigh on the AFHRI for the rest of the year.

“Following the predictable sharp downturn in the AFHRI in the second quarter of 2020 owing to the [Covid-19] pandemic, most of the key indicators have staged a fairly swift recovery, with the trend line moving back to a positive growth trajectory,” says economist and index author Dr Roelof Botha.

“Although the index moved sideways over the past four quarters, it is now 2.4% higher than in the first quarter of 2019, signalling a full recovery from the pandemic.”

The AFHRI, commissioned by Altron FinTech to provide essential data on the financial health of South African households in general and their ability to cope with debt, had a first-quarter reading of 109.9.

This is compared with the level of 110 recorded in the first quarter of last year and a 2.5% decline quarter-on-quarter, the latter of which Botha believes is not a cause for concern.

“This is a traditional seasonal trend, and it is still a relatively better performance for this quarter than the country’s gross domestic product (GDP) for example, which declined by 3.6% between the fourth quarter of last year and the first quarter of this year.”

He adds that the AFHRI trend line is broadly in line with a number of other recent economic indicators, including GDP, retail trade sales and the South African Reserve Bank’s leading composite business cycle, which reached an all-time record high in 2021, along with the Absa Purchasing Managers’ Index for the manufacturing sector.

“One of the advantages of the AFHRI is that it allows for comparisons over time, with 16 other indicators that have a bearing on the financial resilience of households. Major variations in the indicators, therefore, serve as a pointer for the likelihood of a future improvement in, or deterioration of, household finances.”

Since the base period for the index, which spans eight years, only four of the 20 indicators recorded negative outcomes, three of which are marginal, he says.

“The only one that warrants a measure of concern is the level of credit impairments by banks, which remain 21.5% higher than immediately before the pandemic. Although an improvement has occurred over the past year, the return to restrictive monetary policy may thwart further progress,” he continues.

On a year-on-year basis, only six of the 20 indicators recorded declines of more than 1%, a clear indication that a measure of stability has returned to the financial disposition of households.

“Fortunately, two of the four indicators that have a large weighting recorded positive growth over the last year as well as since pre-Covid. The best performance was provided by ‘Public Sector Employment’, with ‘Public Sector Salaries’ also faring well.”

However, it is a point of concern that employment levels in the more productive private sectors have not yet fully recovered from the pandemic, although marginal growth occurred over the past four quarters.

Given the strong positive correlation between private sector credit extension and GDP growth, Botha believes that the government needs to urgently reconsider the undue regulatory burden placed on the formal microfinance sector.

“Unless lower income groups are allowed easier access to credit, the pace of employment creation in South Africa will remain muted,” he warns.

Another concern raised is that the Monetary Policy Committee has returned to a hawkish policy stance at a time when various sectors of the economy have not yet fully recovered from the debilitating effects of the pandemic.

“Unemployment recently rose to the highest level in South Africa’s modern history and aggregate demand in the economy remains muted. The latter is evident in the fact that capacity use in manufacturing was only 77.8% during the first quarter of the year, 3.7% lower than the level of 80.8% recorded in the first quarter of 2019.

“Significantly, insufficient demand was responsible for almost 50% of the unused capacity during the first quarter of 2022, a clear sign of an absence of demand-led inflation in South Africa. It is important to note that stricter monetary policy in a country like the US is warranted from two perspectives, the first being that the US has returned to virtually full employment and, secondly, the real mortgage rate remains negative, even after recent rate hikes by the Federal Reserve.”

He believes that South Africa’s monetary policy stance is out of synch with most of its trading partners.

“This is vividly illustrated by the fact that few countries have higher real interest rates. In a country where capital formation is desperately required to facilitate higher economic growth and employment creation, it is inconceivable that the cost of capital is so inordinately high,” he concludes.