Middle class South Africa is in trouble

New data shows that relentless increases in interest rates and inflation are pummeling middle-class South African consumers – who have had no significant increases in take-home pay over the last five years and now rely on unsecured credit to keep their heads above water.

This data comes from DebtBusters – one of South Africa’s largest debt counsellor companies – which has compiled its quarterly Debt Index from data provided by clients who have applied for debt counselling.

According to DebtBusters’ Q3 2022 Debt Index, there has been more than a 30% increase in demand for debt counselling compared to the same period in 2021 – indicating the financial stress South African consumers are currently experiencing.

DebtBusters CEO Benay Sager said that the increasing demand for debt counselling is from consumers who were first-time buyers of assets while interest rates were at historical lows before November 2021, who are now overwhelmed with their interest-adjected repayments.

Interestingly, Sager also noted that the number of debt obligations has decreased from 7.6 to 6.1 per consumer – indicating more debt per credit agreement and that people are reaching the stage where they are seeking assistance sooner.

DebtBusters has been compiling its quarterly Debt Index since 2016, and it shows how much inflation has eroded consumer income while rising interest rates are adding to debt-service costs.

According to Sager, while nominal income was on a par with 2016 levels when cumulative inflation is considered, the money in South African wallets and purses bought one-third less than it did six years ago – representing a 33% decrease in consumers’ purchasing power.

It is, therefore, unsurprising that the average consumer enquiring about debt counselling is spending 62% of their take-home pay to service debt, showing a higher debt-service burden.

More alarmingly, the debt-to-income ratios for consumers at either end of the income spectrum are the highest recorded.

For those taking home less than R5,000 a month, the total debt to annual income ratio is 87%, while for those with a take-home income of R10,000 or more – representing the country’s middle class – the ratios have hit historical highs.

Sager says that this has resulted in unsustainably high levels of unsecured debt.

The average unsecured debt levels were 26% higher than in 2016. While this is lower than some other years, he said that for consumers taking home R20,000 or more, the unsecured debt levels were 50% higher.

Sager added that this is a direct result of the erosion of net income (take-home pay), where consumers need to supplement this erosion with unsecured credit.

Sager noted that vehicle debt has increased in the last few years, indicating that more consumers with assets (vehicles in particular) are seeking financial assistance. The data also showed that, compared to a few years ago, the consumer age profile indicates increasing financial stress from individuals aged 45 or older, which is another concern.

He said that inflation and interest rates are very likely to keep rising into the New Year and South Africans need to do everything possible to reduce the cost of credit and protect their assets.

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