Private sector credit extension accelerated to 4.6% year on year in September, from a marginally revised 4.39% in the previous month, shocking market expectations of a 3.5% rise due to a tough economic environment and higher borrowing costs.
The data released by the SA Reserve Bank on Monday shows the September reading marked the 27th consecutive period of growth in credit in the private sector, albeit the second-softest reading since February 2022.
Bank data shows the change was driven mainly by the other loans and advances category, which includes unsecured credit to households and companies.
Growth in loans and advances, excluding bills and investments, quickened to 5.3% year-on-year from 4.9%. The boost came from increased credit to companies, which jumped to 5.1% from 3.8%, Nedbank Group’s economic unit said in a statement.
The data shows the acceleration in company loans was mainly driven by a resurgence in general loans, up 5.5% y/y from 2.6%, and a sharp increase in credit card usage, up 19.1% from 6.9%.
Instalment sales and leasing finance also remained high, expanding by 13.7% y/y. This was, however, lower than August’s 15.5%.
Overdrafts contracted for the first time since June 2021, down by 0.6% in September.
Growth in mortgages moderated further to 4.5%, its lowest level since March 2021, while instalment sales and leasing finance eased to 9.3% from 10%.
Credit demand has been responding to rapid interest rate hikes, a lack of business prospects and widespread pessimism from households and businesses.
In recent months, companies have been reluctant to take on extra credit due to the prevailing tough economic conditions which have been affecting their bottom lines. The resulting weak confidence, load-shedding and transport bottlenecks have worsened the situation.
The outlook for consumer spending also remains bleak, affected by limited job creation, slower income growth and tighter credit conditions. Consumers have also had to deal with sticky inflation, sharply higher interest rates and tightening lending standards by commercial banks.
“This bodes poorly for any credit-driven growth hopes,” RMB economists said. “In particular, the demand for mortgages is being weighed down by higher borrowing costs and weak labour market conditions, which increase the risk of a long-term financial commitment.”
RMB said while inflation is picking up on the external effect of higher oil prices, lower monetary base pressure will help ensure that domestic inflation is unlikely to worsen the situation.
Nedbank senior economist Johannes Khosa said disposable income is likely to remain under pressure during the rest of the year as inflation is forecast to rise moderately in the coming months.
“The slowdown in employment growth is also expected to intensify as the tough economic environment makes private companies more reluctant to expand their workforce,” Khosa said.
He said the blow from higher interest rates will intensify, with debt service costs forecast to consume more than 9% of household income by yearend.
“More consumers are likely to experience financial stress during the second half of the year. The National Credit Regular reports a sharp increase in debt defaults, particularly on mortgages and unsecured credit,” he said.
He said Nedbank forecasts growth in consumer spending to slow to a weak 0.7% in 2023 from 2.5% in 2022.
Nedbank expects credit growth to remain modest in the coming months, ending the year at about 6% from 9.2% in December 2022.
Khosa said Nedbank expects banks to be cautious of extending loans given the rising defaults.
“We forecast bank credit growth to remain subdued in early 2024 before gradually picking up pace during the second half of next year as interest rates ease and the economy improves slightly,” he said.
Household finances should gradually improve next year.
He said real incomes are forecast to return to growth as inflation falls closer to 4.5%.
“Debt services costs are likely to ease as borrowing slows and interest rates decline. We forecast slightly faster growth in consumer spending of 1% and 1.9% for 2024 and 2025, respectively,” he said.
Correction and update: October 30 2023
This article has been corrected to indicate that growth in private sector credit extension was forecast to slow to 3.5% rather than to contract by 3.5%. It has also been updated with new information and comment.
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