Despite increasing wealth and becoming a consumer force to be reckoned with, the emerging black middle class faces financial risks from job volatility and unexpected interest rate hikes. On the positive side, despite increased access to credit and rising levels of indebtedness, this segment of the population is still in many ways shielded from the far greater economic shocks such as property bubbles and over-heated stock markets.
According to T-Sec economist Mike Schussler, the median income earner in South Africa earns around R7 000 per month. After medical aid, pension and tax, he or she takes home on average R5 000 to R6 000 a month. Schussler says this income group has been one of the major beneficiaries of the tax breaks over the past few years. “A person earning less than R100 000 a year only pays 18% tax on any income they earn over R35 000.”
Despite rising disposable income, Schussler says job volatility is one of the greatest threats facing this market. “Although we are seeing net job creation and salary increases, it belies the underlying situation where there is a high level of job turnover and people are not guaranteed a lifetime job.”
As this new emerging middle class increases its income so its ability to increase its debt grows and much of the consumption driving the economy has been a result of credit expansion on the back of rising disposable incomes. “Every economy in the modern world is built on credit, so not being able to service that debt would be a major risk,” says Schussler.
At the same time, there is a wide divergence of salaries across sectors, which means that even if a person is able to find a new job he or she may not be guaranteed the same level of income in a similar position in a different industry. “You find in some companies like Eskom or Transnet they have very high minimum wages where even a cleaner who has been there for more than three years can be earning up to R4 000 a month; however, other sectors like retail do not pay as well.”
Goolam Ballim, economist at Standard Bank, has recently issued a report that analyses the risk of interest rates and indebtedness in South Africa.
He says that the greatest beneficiaries of empowerment, which he describes as still in an embryonic stage, are the upper black income levels. “In 1998, the number of black households that fell into the high-income strata was only 6%; however, by 2004 that number had more than doubled to 13%.” Ballim says the middle-income segment has also expanded, with 22% of black households falling into the middle-income group as opposed to 19% in 1998.
“The biggest risk facing this sector is financial literacy and general debt management,” says Ballim, who believes that education in these areas is the most important ingredient in promoting a sustainable household balance sheet. “Education prevents people from being over-indebted and encourages savings so that in the event of economic shock they are better able to weather the storm.”
Another risk is that these new entrants to the financial industry have not yet established a wealth stock (asset base) or savings pool that could act as a safety net. “If there is a material shock to the economy either through high oil prices or tightening in monetary policy they will have a very shallow safety net.”
Ballim says it is important to remember that, although the middle class is increasing its indebtedness levels as its incomes increase, it is coming from a position in which it is emerging from an under-leveraged position. There are still segments of the population that are not leveraged enough. At the same time, a great deal of expenditure by black households is on asset-backed items that have an inherent value to begin with. “They are matching their liability with assets, which is less threatening than if it was purely debt for immediate consumption.”
Ballim says that, although anyone in debt will be negatively affected by rising interest rates, there is far more capacity to absorb interest rates hikes before reaching the financial stress levels experienced in 1998. “Interest rates would have to more than double or indebtedness would have to rise from the current 61% to 80% before we would see the same financial stress we experienced in 1998.”
Although a negative wealth shock such as a burst in a property bubble or stock market crash is extremely damaging both to the consumer and the economy, the black middle class is at a much lower risk owing to its low level of wealth stock. Ballim says that properties in the lower and middle price range have lagged behind the upper end and latent demand for property by lower- to middle-income earners continues to drive this segment, which means that these properties are likely to continue to grow at a healthy pace. “There is less risk of declines in the lower and middle property market than the top end.”
Despite black economic empowerment deals, black individuals still make up a relatively small percentage of investors in the JSE and are mostly exposed to the market through pension funds. Ballim says that they would therefore have a much longer term view on their investments and would be less affected by a short term correction in the stock market.