borrowing likely to show ease  
29 April 2008

Shocking inflation figures last week hardened the case for another rate hike at the Bank’s next policy meeting in June, to stem second-round effects of soaring price pressures.
Governor Tito Mboweni added fuel to the speculation, saying there could be an emergency meeting of the monetary policy committee (MPC) before June because of the worsening inflation outlook. 

The Bank held an emergency monetary policy meeting, which resulted in a rate hike after the rand dived to a record low against the dollar late in 2001, also fanning inflation.  But for the time being, there are still six weeks to go before the next MPC meeting, and there will be plenty of new data by then to consider. Private sector credit extension (PSCE) has grown at an annual rate of more than 20% since the start of 2006, but has slowed from a peak of 27,5% in October last year.

Household consumption, on the other hand, has slowed markedly, growing 3,8% in the final quarter of last year compared with 9,5% in the same quarter of 2006. Retail sales growth sent a similar message until recently it accelerated 2,5% in February, despite forecasts for a contraction.  Credit growth has been even slower to respond, even after the introduction of tougher lending rules in June last year.

But Standard Bank says an unexpected slowdown in PSCE in February “torpedoed” any idea that South African consumers are spending recklessly.  Growth in mortgage advances the main component of PSCE leasing finance, and other loans and advances all began a “rigorous” slowdown since the beginning of last year, it said. “This leaves us firm in our conviction that higher interest rates, rising prices, and more stringent lending criteria are impacting on consumers’ hunger for credit,” it said.  This is good news as household debt as a percentage of disposable income rose to a record 77,6% in the fourth quarter of last year. Rising interest rates have boosted debt service costs for households to 10,9%, their highest since 1999. This has helped bring about a dramatic 56% surge in nonperforming loans in the last quarter of last year a trend the Bank says must be “closely monitored”.

Nedbank chief economist Dennis Dykes says consumers are under more pressure than they were during the past two spikes in inflation, which started in 1998 and 2001.
“Its the combination of much higher consumer debt combined with high interest rates, and the squeeze on the inflation side eating into disposable incomes,” he said.

Mariam Isa, www.businessday.co.za