In October 2011, SA growth in broad money supply (M3) was recorded at 7.3%y/y, which is slightly above the 6.8%y/y recorded in September 2011, and above market expectations for a rise of 6.7%y/y. Despite the larger than expected increase in October, the overall trend in money supply growth remains fairly subdued, and is clearly not fuelling inflation.
Private sector credit rose by a relatively modest 0.5%m/m (R11.3bn) in October after growing by a mere 0.1%m/m (R3.0bn) in September 2011. Consequently, on an annual basis, the rate of change in private sector credit was recorded at a subdued 5.52%y/y, slightly up on the 5.47%y/y recorded in September. The reading was below market expectations for a rise of 6.7%y/y. The increase in credit in October was mostly due to a R10.6bn increase in the ‘other loans and advances’ category.
Mortgage credit, which is the largest component of private sector credit, rose by a very subdued 0.1%m/m or R0.67bn in October. On an annual basis mortgage credit is up only 2.1%, which is consistent with the sluggish levels of activity in the residential and commercial property sectors.
Consumer credit increased by a further R7.65bn in October (+5.3%y/y). During the first ten months of 2011 consumer credit has risen by a total of R50.2bn, which compares with R63.1bn during the corresponding period in 2010. The annual rate of growth in consumer credit is still extremely modest (+5.3%y/y), especially for this phase of the business cycle and the fact that interest rates are at their lowest level since 1974. Clearly, the NCA coupled with conservatism on the part of banks, have combined to keep household credit growth, most especially mortgage advances, well contained.
However, the growth is unsecured credit to households remains the clear exception – especially to the lower LSM groups. Based on the BA900 returns, the growth in unsecured credit rose by more than 30%y/y in September (data lags by one month) or R19.8bn. Clearly this is the fastest growing component of the credit market.
The latest breakdown of the growth in household credit, by main category, is as follows: (each category below reflects only the growth in credit to households and not the total growth of that category of credit):
- Other loans and advances (unsecured credit to households) +30.2%y/y
- Instalment sales (mostly to finance vehicles) +14.3%y/y
- Credit card debt +3.4%y/y
- Residential mortgages +1.6%y/y
- Overdrafts to households -1.2%y/y
- Commercial mortgages to households -5.2%y/y
- Farm mortgages to households -13.4%y/y
The growth in unsecured credit is clearly reflecting in the growth of SA retail sales, especially retailers which are focused on the lower LSM groups.
Furthermore, the huge disparity in the rate of growth of the various categories of credit is resulting in mixed signals about the state of the domestic economy. Some areas of the economy (for example residential property - especially coastal properties, retailers focused more on the higher LSM groups, many small business operators, building contractors etc) are experiencing and reporting extremely tough trading conditions. In contrast, retailers focused on the lower LSM groups as well as motor dealers have experienced reasonably good trading conditions.
Overall, it is clear that the rate of expansion in private sector credit (total) remains relatively muted and has lagged the overall economic recovery. During most economic upswings, the initial part of the recovery is driven by a rise in incomes (cash sales) and not a rise in credit. Credit demand, typically, emerges a little later in the recovery (especially if inflation starts to rise).
However, during this cycle, the delay in credit growth (especially mortgages advances) has been compounded by the fact that the banking sector has been digesting a surge in bad debts relating to the previous credit excesses, the ongoing impact of the NCA and that banks are no longer offering the ‘two-below-prime” deals they did a couple of years-ago.
The clear exception is unsecured credit to consumers, which is growing at a very rapid pace. The rate of growth in unsecured credit (in excess of 30%y/y) is concerning given that the rise in living expenses are starting to erode the household sector’s disposable income. In other words, the higher inflation rate is effectively changing the household sector’s ability to afford additional credit. Hopefully this segment of the credit market is being very carefully managed from an affordability perspective.
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