Reserve Bank Governor Tito Mboweni’s and his boss, Minister of Finance Trevor Manuel’s concern over household debt is ”outdated”; while consumer spending that is currently driving strong economic performance is to be ”nurtured and encouraged”, not threatened with rate hikes. That is according to Investec economist Brian Kantor, who spoke to the media with colleague Carmen Marchetti.
South Africa’s household debt-to-income ratio is at 60%. Kantor and Marchetti expect it to move to 70% over the next two years. This is on the back of what seems like frightening credit growth. The private sector credit extension (PSCE) is growing at more than 20% a month, with mortgage loans and car finance driving the growth.
Kantor argues that undue concern over debt stems from a failure to understand it in the context of improved household balance sheets, more specifically the asset side of it.
Household balance sheets have improved dramatically over the past three years as a result of the stock market and house price boom. Net wealth as a percentage of household disposable income has risen to 374%, up from 2001 levels of below 260%.
This, combined with South Africa’s efficient system of property registration, which allows for asset-backed finance, is what drives the growth. That asset-backed system does not, for example, exist in China, thus excluding the rural poor from accessing credit. ”Democracies,” Kantor says, ”are consumer-driven societies.” Marchetti notes that what the Reserve Bank is frowning at is exactly what renowned economist Hernando De Soto advocates as a means of helping the poor: the use of property law to liberate spending potential.
Kantor and Marchetti have praise for the manner in which the Reserve Bank ”elegantly balances” the benign inflation outlook and the risk posed by high oil prices in its latest monetary policy review.
The Investec team released an investment strategy report earlier this month, arguing for less exposure to emerging markets over the second quarter. The events of this week, when there was blood on the market floor on Tuesday, seem to vindicate this call.
Kantor’s only plea is that when the rand weakens more significantly than it did this week, the Reserve Bank should leave interest rates and allow the rand to become a shock absorber while it finds a new level. This is because low interest rates are the driver of consumer and business confidence. Well, Manuel never listened to Kantor when he urged him to remove exchange controls in one go and chose instead a gradual approach. Let’s hope this time, Mboweni listens.