Debt continues to hog the headlines internationally, with Republicans and Democrats in the United States playing kamikaze – staring each other down to see who will blink first on the issue of raising the country’s debt ceiling.
The American crisis, coupled with debt worries in Europe, where Italian and Spanish borrowing costs hit record levels for the euro era, led gold to break through $1 600 an ounce for the first time.
In South Africa we have not escaped debt headlines. Reserve Bank statistics show that household debt as a percentage of disposable income is at a worrying 76%. This has eased somewhat from a high of 80%, reached in late 2008.
This level of indebtedness has ratcheted up from just 50% in 2002. Consumer debt in South Africa appears to be at disastrous levels, according to many press reports, most recently one on the front page of The Times newspaper.
Similarly, Business Day reported last week, based on the same figures, that credit-fuelled lifestyles were a recipe for disaster and that the need for instant gratification and a lack of savings were resulting in serious debt.
Consumer debt stands at R1.2-trillion, up from just R300-billion in 2002.
On the face of it South African consumers have a tonne of debt, with most of their disposable income going to service it.
Disposable income refers to income after taxes have been paid. Apparently four-fifths of after-tax income goes just to service debt, leaving one-fifth for food, school fees and uniforms, transport, insurance and medical costs. The situation looks desperate, even hopeless.
But this widely quoted indebtedness figure is so misleading that, to all intents and purposes, it is wrong.
It refers to all household debt. This includes mortgages, vehicles, furniture and other durables — debt that will be repaid over a significantly longer period than a year. The 80% indebtedness figure is calculated as though consumers would have to meet their debt commitments in just a year.
Put in numbers it would mean the equivalent of consumers collectively paying off in a single year R1.2-trillion in loans from a combined annual disposable income of R1.5-trillion.
The more useful ratio is interest paid as a percentage of disposable income.
Reserve Bank economist Johan van den Heever says that, using this measure, the cost is just 7% — and this has fallen from a peak of 12% when the world’s financial system went into meltdown.
Van den Heever says that the conclusion that households are hopelessly in debt based on the ratio of total household debt to disposable income is “horribly wrong”.
He says the 7% interest service cost as a percentage of income is “fairly tame” and not out of line with international norms, though these can vary from country to country depending on the levels of indebtedness and interest rates.
Van den Heever has compiled a balance sheet for South African households, which shows that they are financially in a healthy state.
Liabilities include mortgage advances of R753-billion and “other” debt of R429-billion.
Assets include R1.6-billion of residential properties, pension and insurances of R1.8-billion, bank deposits of R520-billion and “other” assets of R640-billion.
With total assets of R6.7-trillion against liabilities of R1.2-trillion, South African households have a net worth of R5.5-trillion.
This analysis also shows that South African households have significant equity, about 50%, in their properties.
Van den Heever says that revaluation effects, as property values have risen, have led in part to an increase in asset values.
He says that the aggregate hides detail and that there are undoubtedly households in distress, but the overall picture is one of relative health.
The registrar of banks, Errol Kruger, came to a similar conclusion in his 2010 report on banking supervision, finding that impaired or non-performing loans made up 5.8% of the total. He concluded that South Africa’s banking system was “safe, stable and sound” for the reporting period.
National Credit Regulator (NCR) data shows that for the fourth quarter of last year 89% of mortgages were current, meaning that payments were up to date.
In the case of unsecured credit, where the granter of the loan does not hold security in the form of a property, for instance, 73.2% of loans are up to date.
NCR data shows that the regulator is receiving 6 000 applications a month from distressed consumers and about 100 000 people of a total 18-million with credit accounts are in formal debt counselling.