By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Koketso Mano
High for longer: A quick pulse check on the credit market
On Tuesday, the South African Reserve Bank (SARB) released its semi-annual Monetary Policy Review (MPR). In short, the MPR reiterated that the uncertainty regarding the disinflation path back to target has risen in recent months as new risks emerged while others materialised. Although interest rates have remained unchanged since May 2023, the MPC has assessed upside risks to inflation at every meeting since. These ranged from tight oil markets to strained supply chains amid geopolitical tensions. Furthermore, the MPC cautioned that domestic food price inflation remained volatile and susceptible to El Niño weather conditions as well as load shedding. In addition, a weaker rand, along with elevated inflation in trading-partner economies, added to imported inflation, while inflation expectations remained elevated. Given these developments, along with heightened uncertainty about global disinflation amid sticky services inflation, markets now expect rates to remain high for longer, and the awaited cutting cycle shallower than initially envisaged. Within this context, we take a bird's-eye view on the consumer credit market, using the latest NCR data.
The volume of new credit applications reached a new peak in 4Q23. Lenders, however, have kept low approval rates, with the volume of new credit breaking through pre-pandemic levels only in 4Q23. Low approval rates are consistent with stringent lending standards, against the backdrop of stretched household finances. Nevertheless, the divergent trends in the bank and non-bank sectors persist. Whereas the volume of new credit granted by banks is yet to recover to pre-pandemic levels, the non-bank sector has surpassed this benchmark by 7.2% (Figure 2). In value terms, however, bank credit has outperformed relative to pre-pandemic levels, despite the cut back in 2023. This means that a handful of consumers are approaching banks for high-value credit, while the masses look towards non-bank lenders for micro-loans to supplement their day-to-day spending needs (Figure 3). Short-term credit1 and credit cards were the most popular in 2023, and still indicative of distressed borrowing, mainly among lower income consumers.
Against this backdrop, credit defaults have continued to rise across all types of credit (Figure 4). Strikingly, mortgages, with traditionally low default ratios, have been more severely affected, prompting lenders to cut back new mortgage loans. According to the NCR data, new mortgages, including non-bank mortgages, declined by 21% in 2023.
Nevertheless, the number of consumers with impaired credit records has remained below historical levels, implying that these defaults are contained among a few customers. With the high-for-long interest rate narrative firmly entrenched, and consumers still seeking pricier consumption credit, we are concerned that defaults will continue to creep higher, become more dispersed, or both. This will dim expectations of a consumer-led GDP growth recovery in the coming months.
Week in review
The leading business cycle indicator increased materially in March, recording 1.7% m/m from -0.2% in February, and arresting the prior two consecutive months of decline. This reflected a lift in five constituent variables, which outweighed decreases in the other half. The primary drivers of the improvement were the trend growth rate of job advertisement space and the number of residential building plans passed. On a year-on-year basis, the leading indicator fell by 0.9%, from -2.9% previously. The improvement in the leading indicator is encouraging but this annual data still marked twenty-three consecutive months of decline and an overall weak economic climate is likely to persist.
Producer inflation increased slightly to 4.6% y/y in March from 4.5% y/y in February, defying our expectations of a slowdown. The monthly pressure was notable at 1.1% m/m, driven by a significant 6.1% and 5.4% monthly surge in petrol and diesel prices, respectively. Monthly pressure on food, beverages, and tobacco products stood at 1.2%, largely fuelled by a 2.8% increase in beverages and a 2.0% rise in tobacco products. Excluding petroleum products, producer inflation eased to 4.4% y/y from 4.6% y/y. Meanwhile, intermediate producer costs have been gradually rising, reaching 1.7% y/y in March from a low of -2.9% y/y in September 2023. This trend suggests that supply chain pressures are gradually building and impacting raw material prices. Indeed, the Shanghai Export Containerised Freight Index has experienced a significant uptick since December 2023, reflecting escalating shipping costs.
Week ahead
On Tuesday, data on Private Sector Credit Extension (PSCE) for March will be released. In February, PSCE ticked marginally higher to 3.3%, from 3.2% previously, with support from both the household and corporate sectors. Corporate credit grew moderately by 2.7% y/y, up from 2.4% y/y previously, while household credit expanded by 4.1% y/y, largely unchanged from the previous month. Overall, the moderate growth in PSCE underscores the impact of past interest rate increases on credit uptake. Adjusted for inflation, annual PSCE growth has been negative since August 2023, indicating tighter credit conditions and supporting the expectation of interest rate reductions in 2H24.
Also on Tuesday, the trade balance for March will be published. In February, the trade balance reverted to a surplus of R14.04 billion after falling to a deficit of R9.69 billion in January. Year-to-date, the trade balance measured a R4.35 billion surplus, reflecting an improvement from a trade balance deficit of R14.57 billion in the corresponding period last year. The February trade balance surplus of R14.04 billion was primarily underpinned by strong monthly exports growth of 12.4% to R161.85 billion, while imports declined by 3.8% to R147.81 billion. Compared to the same month last year, exports were up by 6.9%, reflecting a 32.1% increase in vehicles and transport equipment exports, a 9.0% increase in base metals, a 6.8% increase in mineral products and a 36.0% increase in vegetable products.
On Thursday, the Absa Purchasing Managers' Index (PMI) for April will be released. The PMI slipped back into contractionary territory, recording 49.2 index points in March from 51.7 points in February. The index average was flat between the last quarter of 2023 and the first quarter of this year, suggesting that manufacturing activity will remain muted, as reflected in the 4Q23 GDP data. The decline in March exhibited declines in the business activity and new sales orders indices, highlighting persistently weak demand. Positively, the supplier deliveries index has also softened, suggesting an easing of port congestion and that imported supplies are received with less delay. This unbottling of input supply should support higher inventories in future. In line with this, respondents expect improved business conditions in future, and this should bode well for employment in the sector. Unfortunately, purchasing prices are rising and should further constrain margins and foster a delay in interest rate cuts if passed on to consumers.
Also on Thursday, the Naamsa new vehicle sales data for April will be released. New vehicle sales plummeted by 11.7% y/y (5 877 units) in March from -0.9% y/y in February. According to NA AMSA, pre-existing constraints to the business environment were amplified by the Easter Holidays in March and culminated in an eighth consecutive month of declines - the deepest since the Covid-19 related lockdowns in 2021. Overall, the 1Q24 aggregate new vehicle sales were 5.3% below the corresponding period in 2023, reflecting the tight financial conditions and still elevated cost of living. Encouragingly, the latest PMI indicates more upbeat conditions in the next six months, likely augmented by expectations of lower interest rates and easing logistical constraints.
Last on Thursday, data on electricity generated and available for distribution for March will be published. Electricity production surged by 4.2% y/y in February, marking a notable acceleration from the 0.8% y/y growth observed in January. Furthermore, seasonally adjusted electricity production, critical for the official calculation of quarter GDP growth, experienced a solid 1.6% m/m growth, nearly offsetting the 1.8% decline recorded in January. However, to ensure a positive contribution to 1Q24 GDP growth, the electricity sector will require sustained and robust monthly increases in March.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 23 Apr | SA | Leading business cycle indicator | Feb | 112.8 | 110.9 |
| 25 Apr | SA | PPI % m/m | Mar | 1.1 | 0.5 |
| SA | PPI % y/y | Mar | 4.6 | 4.5 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 30 Apr | SA | Private sector credit extension % y/y | Mar | -- | 3.3 |
| SA | Balance of trade Rbn | Mar | -- | 14.0 | |
| 2 May | SA | Absa PMI | Apr | -- | 49.2 |
| SA | New vehicle sales | Apr | -- | -11.7 | |
| SA | Electricity production % m/m | Mar | -- | 1.6 | |
| SA | Electricity production % y/y | Mar | -- | 4.2 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 74,329.37 | 1.4% | 1.0% | -4.9% |
| USD/ZAR | 19.04 | -0.6% | 0.5% | 3.4% |
| EUR/ZAR | 20.42 | 0.3% | -0.7% | 0.6% |
| GBP/ZAR | 23.81 | 0.0% | -0.4% | 3.8% |
| Platinum US$/oz | 914.15 | -2.2% | 1.2% | -16.1% |
| Gold US$/oz | 2,331.78 | -2.0% | 7.0% | 17.2% |
| Brent US$/oz | 89.01 | 2.2% | 3.2% | 14.6% |
| SA 10 year bond yield | 11.79 | 1.9% | 3.3% | 8.2% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f | 2026f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.6 | 1.3 | 1.6 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.7 | 1.4 | 1.6 | 1.8 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 4.4 | 4.4 | 3.8 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.0 | 5.2 | 4.6 | 4.5 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.1 | 4.8 | 4.8 | 4.5 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.50 | 18.70 | 17.70 | 18.30 |
