/ 29 June 2023

Energy crisis factors into SA credit trends

Eskom Repairs
Workers carry out repairs at the Tutuka coal-fired power station in Mpumalanga. File photo: Waldo Swiegers/Bloomberg

As South Africa’s electricity crisis persists, demand for alternative energy has helped drive credit growth, according to the Reserve Bank’s quarterly bulletin.

In an analysis of South Africa’s credit extension trends in the corporate sector, the bulletin, released on Thursday, showed that growth in mortgage advances accelerated from a low of 1.8% in January 2022 to 7% in February 2023 — the highest rate of increase since October 2020. This suggested increased demand for solar energy financing, the document noted, as well as for commercial property loans.

The country’s energy quagmire has also driven growth in general loans, which reached a post-pandemic high of 20.2% in September 2022, marking the highest rate since July 2014. 

This growth was partly the result of base effects, the post-pandemic normalisation of production activity, the repairing of infrastructure damaged by the floods in 2022, as well as the funding of the latest bid windows of the Renewable Energy Independent Power Producer Procurement Programme — aimed at bringing additional megawatts to the country’s electricity system through private sector investment.

The steepness in the rebound in general loans to companies in the wake of the pandemic “has exceeded that of the pre-Covid-19 trend and could soon surpass it”, the report noted.

Earlier this year, the treasury gave a boost to the renewable energy market by expanding its tax incentive, announced during the tabling of the budget in February.

The incentive — which is aimed at encouraging rapid private sector investment in renewable projects — initially allowed businesses to deduct the cost of these types of investments over a one-year or three-year period. Businesses could deduct 50% of the costs in the first year, 30% in the second and 20% in the third.

Under the expanded incentive, businesses are able to claim a 125% deduction in the first year for all renewable energy projects, with no threshold on generation capacity. The  adjusted incentive is only available for investments brought into use for the first time between 1 March 2023 and 28 February 2025.

The quarterly bulletin’s analysis of South Africa’s credit trends comes as interest rates have reached a 14-year high, a result of the Reserve Bank’s efforts to rein in runaway inflation. The bank’s monetary policy committee has hiked the cost of borrowing 10 consecutive times since November 2021. South Africa’s repo rate now stands at 8.25%.

However, despite the ratcheting up of interest rates — which ought to cool demand for credit — total nominal loans and advances increased briskly between October 2021 and April 2023, outpacing the annual average growth that was recorded before the pandemic.

During the pre-pandemic period (2016 to 2019), according to the Quarterly Bulletin, total nominal loans and advances increased at an annual average growth of 5.8%. This period was characterised by a relatively stable repo rate of 7%, effective from March 2016 and 6.5% effective from July 2019.

The sudden halt in economic activity that accompanied the pandemic caused credit extension to slow to 1.3% between March 2020 and September 2021. However, in the period that followed (October 2021 to April 2023) year-on-year growth accelerated from 3.1% to 8.8%.

The Reserve Bank’s Financial Stability Review, released in May, flagged elevated credit growth — despite deteriorating economic conditions — as something that should be closely monitored.

According to the Quarterly Bulletin, growth in loans to companies has outpaced that in loans to households, with growth in both moderating more recently.

Credit extension to the household sector increased at a steady pace of around 7% in the second half of 2022 before accelerating to 7.9% in January 2023. This growth then moderated to 7% in April. 

“Although surpassing pre-pandemic growth rates, the demand for most types of credit has moderated thus far in 2023. This possibly reflects the impact of higher food and fuel prices as well as increasing debt repayments due to higher interest rates.”

The higher cost of debt has continued to squeeze households, according to the Quarterly Bulletin. 

The ratio of household debt to disposable income increased from 61.6% in the fourth quarter of 2022 to 62.1% in the first quarter of 2023, as the nominal value of households’ debt increased more than their disposable income. Households’ cost of servicing debt relative to their nominal disposable income increased from 7.9% in the fourth quarter of 2022 to 8.4% in the first quarter of 2023, as both the stock of debt and interest rates increased. 

The strain on household finances has been reflected in the recent deterioration of consumer confidence.

Also released on Thursday, the consumer confidence index — compiled by FNB and the Bureau for Economic Research — fell to -25 index points during the second quarter of 2023.

According to a press release, the index has varied between a low of -36 (recorded during the hard lockdown in the second quarter of 2020) and a high of +26 (when Cyril Ramaphosa was elected president in the first quarter of 2018). The index has recorded an average reading of zero since 1994. 

The latest reading of -25 is the second-lowest reading on record since 1994 “and indicative of tremendous concern among consumers about South Africa’s economic prospects and their household finances”, the release noted.

A more detailed analysis of the index shows that confidence among high-income households (earning more than R20 000 per month) deteriorated the most — falling from -31 to a new historical low of -40.

FNB chief economist Mamello Matikinca-Ngwenya said: “Further interest rate hikes, rand depreciation and concerns about South Africa’s diplomatic relations with the rest of the world in all likelihood compounded the negative impact of the electricity crisis on high-income confidence.”

Affluent consumers, she noted, are more likely to have invested — at great expense — in alternative electricity sources, such as solar or battery power, and are also more inclined to have debt that is tied to the soaring prime interest rate. 

“With the prime interest rate having increased by 475 basis points over the last two years, debt servicing costs are really starting to bite. The weaker rand exchange rate is also putting upward pressure on the cost of overseas travel and imported goods, such as new vehicles, typically purchased by affluent consumers.”