In a sign that confidence in SA’s economy is improving, companies are showing more appetite to take on debt.
This was reflected in Reserve Bank data on Wednesday that showed private sector credit extension accelerated to 3.6% in February compared to a year earlier, and up from 3.1% in January. The reading was higher than expected and was driven mostly by corporate borrowers. It was the eighth straight month of increase and the strongest rise since August 2020.
Borrowing by companies collapsed in the wake of the Covid-19 outbreak as many businesses were unsure they would survive the lockdowns that closed large parts of the economy.
Instead of borrowing to fund expansion, businesses concentrated on survival strategies, and owners were reluctant to tie themselves up with more debt.
Old Mutual Investment Group chief economist Johann Els told Business Day that SA has seen a strong improvement in overall credit growth over the last year, and there had been a “decent” move from a negative 1.1% in April 2021 to the number for February this year.
“This is pretty decent and, yes, I do believe this somewhat reflects better growth. It does also reflect, to some extent, what we have seen with the GDP slump and then a recovery.”
Els said the recovery shows improved confidence and that companies are happily getting more credit to expand their businesses to increase fixed investment. The Bank data showed that all the sub-components of credit increased in February, with the investments and bills category leading the way. The investment category jumped by 3.8% month on month and reduced the annual rate of contraction from 12.7% to 5.5%. Demand for credit to finance vehicles, mortgages and credit card spending also increased.
Els said improvements in overall private sector credit growth masks the fact that corporate credit growth recovered even more strongly in February, having posted a bigger drop during the lockdown periods. Corporate credit growth had slumped into deep negative territory around April 2021, reaching a negative 6.8%.
“Corporate credit growth was far more negative but recovered much stronger than household credit growth, a sign that confidence is improving. This is true from a policy trends perspective, as well as an improved economic and political environment,” said Els.
Other economists warned that the increase in demand for credit may not be sustained given the economic outlook and obstacles to growth such as the lack of a reliable power source.
“Companies will remain wary of aggressively accelerating capital expenditure due to electricity shortages, slow progress on structural reform and ample spare capacity in some industries,” Nedbank economist Johannes Khosa said.
Khosa said even with the current improvements in household credit extension, household finances will be partly contained by rising inflation, which will hurt disposable income.
“Rising interest rates and poor employment prospects will weigh on consumer confidence, causing households to be cautious of taking more debt, and perhaps rather opting to pay for the existing credit while debt service costs are still low.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.