South African Consumer Credit Health Improves at Greatest Rate Since 2015

South Africans have become accustomed to receiving bad news about the economy, particularly in recent years. But the Q1 2017 TransUnion (NYSE: TRU) Consumer Credit Index (CCI) shows that many households seem to be in better shape to weather economic storms than they were just last year.

In Q1 2017, the CCI climbed at its fastest pace in two years, jumping from 49.7 to 52.4. The CCI is a measure of overall credit health among South African borrowers, based on data gathered on 53.8 million accounts and a revolving credit value of R146 billion. A rating of 50 is considered the break-even point, with lower scores reflecting worsening credit health, which is characterised by an increase of new accounts in default (3 months in arrears), as well as distressed borrowing (using one source of credit to pay off another).

“TransUnion’s latest CCI suggests improved debt repayment behaviour and easing interest costs, but it is also clear to us that South Africans continue to face challenging financial conditions,” said Lee Naik, CEO of TransUnion Africa. “In fact, household cashflow actually weakened by 1% in Q1, due to slow income growth and stubborn increases in the cost of living.”

The central theme in this report is that household debt is growing at a slower pace than household income. Reserve Bank data shows household debt as a proportion of disposable income is declining. TransUnion data shows that credit card and store card credit increased by just 2.5% y/y in Q1 2017, less than disposable income which rose by around 4% over the same period. Meanwhile, active credit accounts fell from a high of nearly 58 million in 2014/15 to around 54 million in Q1 2017.

“Fortunately, lenders have been alert to the macroeconomic risks,” said Naik. “The improved rate of debt repayment, despite weak cashflow, is partly a result of lower overall household credit extension in the same period. In a nutshell, borrowers are less keen on taking on debt, and lenders are more cautious with their lending policies – prudent behaviour, considering South Africa’s levels of indebtedness.”

The report also found that new accounts in default fell by an impressive 5.7%, the fastest rate of decline since 2015, while distressed borrowing increased by 1%, an amount not reflective of much additional financial stress on consumers.

The report cited that a stable rand has been an immense help in cushioning the country’s current perceived instability among international investors, though acknowledged that political uncertainty and sovereign credit rating downgrades were risks that needed to be watched closely in the coming quarters.

“The improvement to the CCI is encouraging news, and a sign of more responsible financial management by millions of citizens. The current political uncertainty, however, threatens to affect South Africa’s macroeconomic outlook, and consumer credit health in the country cannot be expected to dramatically improve until a level of clarity and stability returns,” concluded Naik.