The latest Altron FinTech Household Resilience Index indicates increasing pressure on the household finances of South Africans

TThe results of the latest quarterly Altron FinTech Household Resilience Index (AFHRI) were released today. After a strong recovery from the effects of the pandemic, which took the index to a record high in the fourth quarter of 2021, the AFHRI has taken a dip, mainly as a result of higher inflation and higher interest rates, which are squeezing the finances of most households.

Managing director of Altron FinTech Johan Gellatly says that AFHRI provides valuable insight into the credit sector and is therefore considered a useful yardstick by players in the sector. Altron FinTech uses the information to improve its own understanding of the dynamics of the market its customers serve, so that they design products and solutions that are both relevant and effective. “Our products and solutions also enable our customers to continue to trade in challenging markets efficiently, providing a competitive advantage over their peers.”

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.

Dr Botha further explains: “AFHRI consists of 20 different indicators, all of which are related to sources of income or asset values. The index is weighted according to the demand side of the short-term lending industry and calculated on a quarterly basis, with the first quarter of 2014 as the base period, corresponding to an index value of 100 . All indicators are expressed in real terms, i.e. after adjustment for inflation.”

Although the index increased marginally from the reading in the third quarter of 2022, it fell by more than 1% compared to the fourth quarter of 2021. Dr Botha explains that due to seasonal volatility associated with year-end bonuses and the shopping boom associated with Black Friday and Christmas, it is useful to examine the four-year average trend in the index value.

“In the fourth quarter of 2022, the AFHRI recorded a value of 111.5, compared to 109.9 in the third quarter of the same year, and 112.7 in the comparable quarter of 2021. Given the 2014 base level of 100, this means that the average household’s financial disposition has improved by 11.5% in real terms over nine years. However, the average annual improvement since 2014 is only 1.2%, which serves as a clear indication of the economy’s underperformance, says Dr Botha.

He adds that this is particularly a result of the following:

• A decade of state capture and mismanagement in the public sector between 2009 and 2018 that eroded confidence in business and ultimately led to serious infrastructure shortfalls, particularly in energy, roads and railways.
• Covid-19 lockdown regulations, which decimated economic activity in 2020 and led to the loss of more than two million jobs in a single quarter (Q1 2020 to Q2 2020).
• Higher inflation, mainly due to massive increases in freight rates and global supply side constraints.
• An unwelcome return to restrictive monetary policy by the South African Reserve Bank (SARB), despite the absence of demand growth. The cost of credit – and capital – has increased by more than 60% since the SARB began raising interest rates at the end of 2021.

The table below summarizes the performance of the different indicators that make up the AFHRI over four different periods: since the base period (2014); since the last comparable quarter before the covid-19 lockdowns started (Q4 2019); and both quarter-to-quarter and year-to-year percentage changes. The period since the fourth quarter of 2019 is considered relevant to measure whether households’ financial resilience has fully recovered from the pandemic or not.

“It should be noted that public and private sector employment and remuneration have a relatively high weighting in the AFHRI, as these indicators represent the mainstay of the financial disposition of most households,” says Dr Botha.

• A further increase in employment in both the private and public sectors was one of the main reasons for the relative stability of households’ financial resilience. The upward trend in new job creation continued in the fourth quarter of 2022, with nearly 1.4 million new jobs being created in 2022. Unfortunately, this positive effect was reduced by lower remuneration levels. In real terms, the average monthly remuneration in South Africa has decreased by 11.4% over the past year (from R18 470 in Q4 2021 to R16 370 in Q4 2022). The data refer to the average for both the formal and informal sectors. By the end of 2022, average monthly wages in the formal non-agricultural sectors were almost 60% higher at R26 000.
• Although household financial resilience was strengthened by a significant increase in long-term insurance surrenders, this trend is not conducive to future financial stability and is a clear sign of the difficulties many households face as a result of higher inflation, higher interest rates. and an economic environment with low growth.
• The reciprocity of civil debt defaults and bank credit write-downs has made a positive contribution to AFHRI, confirming the inherent stability of South Africa’s banking system and the prudent management of household debt in general. The latter has largely been necessitated by the sharp decline in the ratio between household income and debt costs.
• An indictment of the SARB’s interest rate policy is the fact that the total extension of credit to households has nowhere near recovered from the effects of the extremely high real interest rates that existed before the pandemic and remains well below the level of a decade ago in real terms.

On this last point, Dr Botha notes that since 1998 the total value of outstanding mortgages has fallen by more than 10% in real terms.

“The South African economy has never been able to grow at sustainably high prices in the absence of meaningful growth in private sector credit extension. To the extent that unwarranted hawkish monetary policy reduces output growth, fiscal stability will also be threatened. Inflation targets are not set in stone and the SARB should consider a temporary adjustment from 3%-6% to 4%-7%. This would immediately allow for a 100 basis point reduction in the repo rate and serve to breathe some life into a stagnant economy.”

Visit the AFHRI site for more insight by clicking here.