What is South Africa’s high household debt doing to our GDP?

Earlier this month ratings agency Standard & Poor’s (S&P) highlighted the high household debt of South African households as a potential risk to the country’s banking sector.

According to the agency’s Banking Industry Country Risk Assessment (Bicra), it estimated the country’s per capita gross domestic product at around $6000 (R78000) for this year, which in US dollar terms was still lower than in 2010.

Matthew Pirnie, S&P analyst, said “We continue to believe that domestic households pose the most significant source of risk for the banks because of their relatively high leverage and low wealth levels compared with other emerging markets.”

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What does this pressure mean for the economy?

“According to recent data from Stats SA, household consumption expenditure accounts for 61% of the total Gross Domestic Product (GDP) in South Africa. Given high debt levels within the household sector, we can expect both consumption and GDP growth rates to remain subdued for an extended period of time,” added Keorapetse Leballo, investment Strategist at Absa.

Has there been a significant increase in South African household debt in the last year?

Between the end of the second quarter of last year and the end of the second quarter of this year, the household debt to disposable income ratio has marginally decreased from 75% to 71%, according to recent Stats SA data.

“High interest rate environments are normally precursors to lower levels of household borrowing. Households often seek to consolidate their debt when interest rates are high and expected to either increase or remain elevated. However, as soon as borrowing rates start to decrease, debt prudency begins to be suspect,” Leballo stated.

What needs to start happening to alleviate this pressure?

“We look to subsiding inflationary pressures to anchor local borrowing rates lower. Should the household sector become prudent with debt during this accommodative cycle of interest rates, prospective propensities to consume will likely improve the consumption and the local GDP trajectory over the medium to long term horizon,” Leballo explained.

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