Altron FinTech launches latest Household Resilience Index

Dr Roelof Botha.

Altron FinTech today released its latest Household Resilience Index (“AFHRI”), covering the third quarter of 2022. After recording an all-time high in the fourth quarter of 2021, the index took a small dip in the first and second quarters of 2022, but has bounced back to a level of 109.8, marginally lower than the value a year earlier.

Due to a traditional increase in the AFHRI during the fourth quarter of each year (due to the shopping boom associated with Black Friday and Christmas), it is useful to examine the four-year average trend.

In the third quarter of 2022, this value was unchanged from the previous quarter (110.5) and only marginally lower than the figure for the three previous quarters (110.9). Since the launch of the AFHRI, the financial resilience of South African households has increased by 9.8% in real terms. The index has fully recovered from the decline experienced during the COVID-19 pandemic.

Recognizing the need for data that provides more clarity on the financial disposition of households in general, and their ability to manage debt in particular, Altron FinTech has commissioned Economist and Financial Advisor to Optimum Investment Group, Dr Roelof Botha, to assist in designing this the index.

Botha says the latest quarterly reading of 109.8 is marginally lower than the 109.9 level recorded in the first quarter of 2022, but 0.6% higher than the second quarter reading.

“Based on positive real GDP growth in the third quarter of 2022, the increase from quarter to quarter was not unexpected. Although year-on-year the index value registered a marginal decrease of 0.2%, this does not constitute a cause for undue concern, but examination of the trends for the various indicators reveals a more pronounced downward trend for household wealth indicators.”

According to Botha, the most encouraging features of the latest AFHRI include the significant employment gains in both the public and private sectors of the economy, as well as a meaningful increase in total household disposable income. The latter has become a consistent trend and households’ disposable income is one of only three indicators that have shown growth over all four periods analysed.

The table below summarizes the performance of the 20 different indicators that make up the AFHRI over four different periods, namely since the base period (2014); since the last comparable quarter before the covid-19 lockdowns started (Q3 2019); and percentage changes from quarter to quarter and year to year.

Botha says the AFHRI trend line shows broad similarity to a number of other key economic indicators, including GDP and retail sales. “It should be noted that employment and remuneration in the public and private sectors have a relatively high weight in AFHRI, as these indicators represent the mainstay of the financial disposition of most households.”

Main conclusions:

• The performance of AFHRI since the outbreak of the COVID-19 pandemic has lagged behind that of the economy as a whole, but only marginally. During the third quarter of 2022, the AFHRI returned to the same level as the comparable quarter before COVID-19 (ie, the third quarter of 2019). Over this period, real GDP growth was only marginally better at 1.1%, a performance largely enabled by record exports in 2021 and 2022.
• A significant increase in employment in both the private and public sectors was one of the main reasons for continued stability in households’ financial resilience. The upward trend in job creation continued unabated in the third quarter of 2022, with total formal sector employment increasing by more than one million in the first nine months of the year. Although more subdued than during the first two quarters of the year, an additional 235,000 new formal sector jobs were created between July and September 2022. Total employment has increased from 14.3 million a year ago to nearly 15.8 millions.
• The fact that neither private sector wages nor public sector wages were able to register positive real growth in the third quarter can be attributed to three factors: a traditional lag between job creation and first pay day; inadequate collection of remuneration in the informal sector by Statistics SA; and many new workers are prepared to work for more modest wages.
• The mutual credit downgrades by the banks have provided a welcome return to a positive contribution to AFHRI, confirming the inherent stability of South Africa’s banking system and the lower default risk that comes from significant new jobs.
• Although the ratio of household income to debt costs has improved considerably since pre-COVID, relatively high negative quarterly and year-on-year readings were recorded in the third quarter. With interest rates likely to rise further during the first half of 2023, this indicator is expected to weigh on the AFHRI until the South African Reserve Bank reverses its unnecessarily restrictive monetary policy stance.
• The negative quarter-on-quarter and year-on-year readings for mutual funds can be attributed to the general weakness in global equity markets over the past year, largely as a result of the US Federal Reserve raising its benchmark interest rate from zero in March 2020 to a range of 4.25% to 4.5% by the end of 2022. Together with the weakness of the Chinese economy and increased geopolitical uncertainty in Eastern Europe, this has led to a fairly prolonged risk-off sentiment among most global fund managers. As inflation has peaked in most countries, including the US, equity markets rebounded strongly during the fourth quarter of 2022, and this trend is expected to have a positive impact on the next AFHRI reading.
• The South African macro economy remains in good shape, as we have seen, blueof positive GDP growth in the third quarter, the resilience of AFHRI, the strengthening of the rand exchange rate and record export earnings in 2022. However, it remains to be seen whether the government can succeed in reversing the general downbeat mood among consumers, mainly due to the escalation of electricity rationing, rotting roads, high fuel prices and higher inflation and interest rates.
• Of particular concern is the fact that household credit extensions were lower in the third quarter of 2022 than 10 years ago (in real terms). This is a clear indication that the high credit and capital costs in South Africa are limiting the country’s growth potential.
• Despite formidable obstacles to economic growth, AFHRI is highly likely to continue its upward momentum during the fourth quarter, largely as a result of the traditional increase in retail sales in November and December each year.

According to Altron FinTech CEO Johan Gellatly, AFHRI, together with the Altron FinTech Short-Term Credit Impact (AFSCI) Index, generates valuable information that gives the company a handle on expected market trends.

“Our clients look to Altron FinTech to be a thought leader in the markets we serve and to incorporate our deep knowledge and experience into our products and solutions to enable them to take full advantage of prevailing economic conditions, both positive and negative. In addition, the index continues to inform key players in our industry, a real necessity in today’s business climate.”

Gellatly says as the index improves, so does the ability to service debt, and it is of the utmost importance to have solutions that help businesses both lend and collect successfully. “The solutions that Altron FinTech provides in the unsecured lending space include loan administration and integrated collection solutions to ensure that our customers in this industry are best positioned to manage their customers and loan books effectively.”

Each month, Altron FinTech registers 530,000 new loans via the South African Credit and Risk Reporting Association (SACRRA) and completes 425,000 credit checks for affordability assessments as part of regulatory compliance.

“We also help our customers manage 2.2 million credit agreements by updating their payment profiles on a monthly basis, and process more than 2.6 million transactions, amounting to more than R2.5 billion in successful collections, every month for our customers . This helps to ensure healthy collection rates.”