Credit market data reveals signs of consumer cracks
Since the beginning of the current interest rate hiking cycle, the SARB has hiked the policy rate by a cumulative 475bps. While monetary policy is now viewed as "restrictive", risks are still tilted to the upside. Among other indicators, we believe the SARB will be closely watching credit market outcomes in assessing whether policy is restrictive enough to bring inflation back to target. In this report, we use the SARB's and National Credit Regulator's data to examine the latest developments in the consumer credit market.
High-frequency bank credit data suggests that consumers are still accumulating consumption credit at a relatively faster pace, though the trend has plateaued in the last few months (Figure 1). In our view, this switch from asset-backed to consumption credit has been driven by distressed borrowing, amid higher living costs, as well as household investment into alternative sources of energy. The slowing pace in the last few months likely reflects tightening lending standards, as high living and debt servicing costs continue to erode consumer's affordability. Indeed, the credit rejection rate (smoothed) has gradually increased to an all-time high of just over 68% in 4Q22, before the 125bps delivered this year, although the volume of applications is also at an all-time high (Figure 2). We expect that lending standards will tighten further, as the cumulative impact of past interest rate decisions filters through.
Retailers leading the non-bank credit charge
In our previous report, we showed that since 2H22, consumers have been steadily upping their non-bank credit uptake. Data shows that the retailer industry's gross debtors' book grew the quickest in 2022, predominantly as demand and supply of credit facilities increased (Figure 3). Disaggregated by type of credit facilities, data shows that issuance of (new) store cards grew the quickest at 26.7% y/y, followed by credit/garage cards (23.6%) and "other" types of facilities, predominantly revolving loan facilities, at 23.6% (Figure 4). Unfortunately, the data does not tell us which types of retailers are driving the trend. However, judging by retail sales data, it's likely to be clothing and footwear retailers. It is also plausible that hardware as well as furniture and household equipment retailers benefited from consumers looking to invest in alternative energy sources. Nevertheless, overall volume sales among these retailers are declining, suggesting that this trend is being outweighed by the declining demand for home improvement. This is consistent with relatively subdued demand, with consumers spending on what they regard as necessities.
Credit defaults on the rise; is the worst yet to come?
As expected (see our outlook section here), the latest bureau data shows that credit defaults1 are rising across all credit types, both in the bank and non-bank sectors. In 4Q22, mortgages saw the largest increase in defaults, of about 74bps, while unsecured credit saw the least increase of 37bps (Figure 5)2. At face value, it might seem surprising that the secured types of credit, particularly mortgages, are seeing more pressure. We suspect that the uptick is predominantly driven by those who entered the property market for the first time during the pandemic, when interest rates were at their lowest (see our previous report, discussing two waves of buying activity). During this time, consumers deleveraged on unsecured credit, a trend that has been reversing since 2H22. With interest rates having risen further, and inflation still stubbornly high, it seems plausible that more defaults in unsecured credit types are on the horizon. This may in turn delay the household consumption recovery even when interest rates start to decrease, as consumers repair their credit standings. As discussed previously, risks to the interest rates outlook are skewed to the upside.
Week in review
Private sector credit extension (PSCE) growth slowed marginally to 7.1% y/y in April, from 7.2% in March and 8.3% y/y in February. This was below market (Reuters) expectations of a lift to 7.3%. The slowdown in PSCE reflected a moderation in household credit, from 7.2% to 7.1%, while corporate credit extension remained steady at 7.1%. Growth in corporate credit was supported by instalment sales, which quickened to 13.2% from 11.7% previously, while investments declined by 11.7%, better than the 15% decline in the previous month. Mortgage extension slowed marginally to 6.5% from 6.6% previously. Year-to-date (YTD), annual corporate credit has grown by 8.0% (January-April), compared to just 3.3% in the corresponding period last year. This is partly due to base effects, but also increased demand for credit related to investment into alternative sources of energy.
From the household perspective, both secured and unsecured credit growth slowed in April. Within secured credit, mortgage extension slowed to 6.4% from 6.6% previously, and instalment sales (predominantly vehicle finance) to 7.8% from 8.1% in March. Overall, secured credit recorded 6.7% from 6.9% in the previous month, and has been decelerating steadily from its peak of 7.7% in July 2022. Unsecured credit cooled to 7.9%, from 8.3.% in March, coming off a peak of 10.2% in January 2023. Within unsecured credit, support came from credit cards which accelerated to 9.1% from 8.4% in March, as well as overdraft facilities (from 3.1% to 3.3%), while general loans and advances slowed to 8.0% from 9.1%. Continued credit growth should somewhat underpin consumer spending and investment, particularly renewable energy-related investment. However, the higher-than-expected increases in interest rates and rising credit defaults pose a downside risk to the medium-term outlook.
The nominal trade balance (not seasonally adjusted) amounted to a surplus of R3.54 billion in April, reflecting a reduction from a downwardly revised surplus of R6.30 billion (previously R6.89 billion) in March. Exports increased by 7.6% y/y to R163.82 billion, while imports increased by 17.6% y/y to R160.28 billion. The YTD cumulative trade balance amounts to a deficit of R3.51 billion compared to a surplus of R78.01 billion in the corresponding period last year. Exports are up by 5.5% y/y, while imports are up firmly by 21.5% y/y on a YTD basis. Growth in exports reflects exports of mineral products, which are up by 7.8% YTD, base metals, which are up by 18.1%, and vehicles, which are up by 8.4%. Weighing on export growth is precious stones down materially by 13.2% YTD. On the import side, growth is underpinned by imports of machinery and equipment (up 36.3% y/y YTD), mineral products (up 26.2% y/y YTD), vehicles (up 54.6% y/y YTD), and chemical products, which are up 5.3% y/y YTD.
The Absa manufacturing PMI declined to 49.2 index points in May, from 49.8 points in April. Business activity and new sales orders remain in contractionary territory, reflecting an unfavourable operating climate for manufacturers. Indications of weaker business activity during the first two months of 2Q23 versus 1Q23 point to less impetus to GDP from the manufacturing sector. Furthermore, expectations for near-term conditions are more pessimistic, likely in anticipation of intensified load-shedding during the winter months, which will compound rising cost pressures given a weaker exchange rate.
Total new vehicles sold were 43 060 in May, a surge of 3 959 units or 10.1% y/y. This followed meagre growth of 0.1% y/y in April. On a month-on-month basis, aggregate sales recorded robust growth of 15.6%. Growth still reflected improved performance in commercial vehicle sales, while the passenger car market has come under strain. Light commercial vehicles grew 38.5% y/y, medium commercial vehicles by 2.7% y/y, and heavy commercial vehicles by 19.3%. New passenger car sales growth was muted at 0.1% y/y. While commercial vehicle sales indicate a continued replacement cycle by business, passenger car sales show slowing demand following the recent uptick in household buying activity as well as the tourism-related replacement cycle. Rising interest rates have compounded pressure on households, which is also reflected in slowing instalment sales credit uptake, and a weaker exchange rate should worsen affordability. In general, domestic economic prospects have deteriorated and should weigh on buying activity going forward.
Electricity production (not seasonally adjusted) declined by 8.6% y/y in April, marking nineteen consecutive months of annual decline. Seasonally adjusted electricity production shrank by 4.3% in April, more than reversing the 4.0% monthly expansion in the prior month. Electricity consumption declined sharply by 8.1% y/y and 4.6% m/m (seasonally adjusted) in April. The weakness in the electricity sector marks a weak start in the second quarter and generally aligns with expectations of sluggish growth this year.
Week ahead
On Tuesday, GDP data for 1Q23 will be released. In 4Q22, real GDP (seasonally adjusted) declined by 1.3% q/q following a 1.8% quarterly expansion in 3Q22. Bloomberg consensus expectations are for GDP to have expanded by just over 0% in 1Q23, generally underpinned by the unexpected expansion in the electricity-intensive sectors (i.e., mining and manufacturing), even as load-shedding intensified in 1Q23 relative to 4Q22. The volatile agricultural sector and unknown variations in some private services sectors remain a risk to the 1Q23 GDP outcome. Against this background and considering upcoming GDP revisions, we maintain our view of a mild recession in the first quarter. Nevertheless, this view has an upside risk, especially as electricityintensive sectors defied load-shedding intensity in the reference quarter.
On Wednesday, data on foreign exchange reserves for May will be published. SA's gross foreign exchange reserves slid to $61.72 billion in April, from $61.85 billion in March. The decline primarily reflects government-related foreign exchange payments and would have been more pronounced had it not been for an increase in the dollardenominated gold price and asset price changes.
Also on Wednesday, the RMB/BER business confidence index for 2Q23 will be published. The business confidence survey results indicated that business confidence remained depressed, with the index falling to 36 points in 1Q23 from 38 points in 4Q22. Confidence declined among building contractors, manufacturers, and retailers. Meanwhile, confidence in the wholesale trade sector and new vehicle dealers increased slightly yet remained at depressed levels. The prevailing global and domestic headwinds, particularly the ongoing hard power shortages, will likely keep business confidence depressed, in turn curtailing broad-based private sector fixed investment required for employment creation.
On Thursday, the current account balance for 1Q23 will be released. After averaging -2.7% of GDP over the 20 years to 2019, the current account recorded a surplus of 2.0% in 2020 and 3.7% in 2021. With a recovery in domestic demand, dividend payments and a fall in commodity prices, the current account moderated to -0.5% of GDP in 2022 (recording -2.6% in 4Q22). The trade balance on goods averaged 3.3% in 2022 (recording a meagre 0.2% in 4Q22), while the balance on the services, income and current transfers account averaged -3.8% in 2022 (recording -2.8% in 4Q22). We anticipate that the current account deficit will widen further this year, to around 2.4%, with risks tilted to the downside as intensified load-shedding and logistical constraints weigh on SA's ability to take advantage of improved global economic growth. Further aspects effecting the current account balance will be the likelihood that imports continue to rise as investments into alternative sources of energy progress.
Also on Thursday, data on manufacturing production for April will be released. In March, total manufacturing output (not seasonally adjusted) contracted by a shallow 1.1% y/y, following a downwardly revised 5.6% y/y contraction (previously 5.2% y/y contraction) in February. Seasonally adjusted manufacturing output rebounded strongly, posting 4.0% m/m in March after declining by 1.3% m/m in February. The PMI business activity index measured 48.1 points in March from 45.5 points in February, indicating that monthly output was expected to improve but remain in contraction due to hard power shortages. In contrast, the stronger-than-expected monthly increase in output reflects the dynamic impact of load-shedding on the economy and adds to forecast volatility. Manufacturing output grew by 1.4% q/q in 1Q23, following a quarterly contraction of 1.5% in 4Q22.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 30 May | SA | Private sector credit % y/y | Apr | 7.1 | 7.2 |
| 31 May | SA | Trade balance (Rand billion) | Apr | 3.5 | 6.3 |
| 1 Jun | SA | Absa Manufacturing PMI | May | 49.8 | 49.2 |
| SA | Electricity production % y/y | Apr | -8.6 | -5.6 | |
| SA | Naamsa vehicle sales % y/y | May | 10.1 | -0.2 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 6 Jun | SA | GDP % q/q Non-Ann SA | Q1 | 0.2 | -1.3 |
| SA | GDP % y/y | Q1 | 0.1 | 0.9 | |
| 7 Jun | SA | Gross Foreign Exchange Reserves ($, Bn) | May | -- | 61.7 |
| SA | Current Account % of GDP | Q1 | -2.4 | -2.6 | |
| 8 Jun | SA | Manufacuring Production % m/m | Apr | -- | 4.0 |
| SA | Manufacuring Production % y/y | Apr | -- | -1.1 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 75,783.25 | -0.5% | -2.3% | 7.0% |
| USD/ZAR | 19.61 | -1.0% | 6.3% | 25.9% |
| EUR/ZAR | 21.10 | -0.5% | 4.0% | 27.4% |
| GBP/ZAR | 24.57 | 0.7% | 6.8% | 26.5% |
| Platinum US$/oz | 1,009.11 | -1.1% | -5.3% | 1.3% |
| Gold US$/oz | 1,978.09 | 1.9% | -1.9% | 7.2% |
| Brent US$/oz | 75.11 | -1.5% | -0.3% | -35.4% |
| SA 10 year bond yield | 11.24 | 1.4% | 10.3% | 13.9% |
FNB SA Economic Forecast
| Economic Indicator | 2020 | 2021 | 2022 | 2023f | 2024f |
|---|---|---|---|---|---|
| Real GDP %y/y | -6.3 | 4.9 | 2.0 | 0.1 | 1.4 |
| Household consumption expenditure % y/y | -5.9 | 5.6 | 2.6 | 0.8 | 1.4 |
| Gross fixed capital formation % y/y | -14.6 | 0.2 | 4.7 | 3.6 | 3.2 |
| CPI (average) %y/y | 3.3 | 4.5 | 6.9 | 5.9 | 5.4 |
| CPI (year end) % y/y | 3.1 | 5.9 | 7.2 | 5.0 | 5.4 |
| Repo rate (year end) % p.a. | 3.50 | 3.75 | 7.00 | 8.25 | 8.00 |
| Prime (year end) % p.a. | 7.00 | 7.25 | 10.50 | 11.75 | 11.50 |
| USDZAR (average) | 16.60 | 14.80 | 16.40 | 17.70 | 17.70 |
Source: FNB
