In May 2011, SA growth in broad money supply (M3) was recorded at 6.1%y/y, which is slightly above the 6.0%y/y recorded in April 2011, and above market expectations for a rise of 5.8%y/y. The overall trend in money supply growth is still soft, but given the extremely low base that has been established, the annual rate of change is still expected to increase modestly during the remainder 2011.
Private sector credit fell by a surprising and substantial 0.4%m/m (-R8.7bn) in May 2011. Consequently, the rate of change in private sector credit was recorded at a mere +5.2%y/y, well down from 6.2%y/y in April 2011. This was also well below market expectations for a rise of 6.3%y/y.
The decline in credit was driven mostly by a fall-off in ‘other loans and advances’ or corporate credit, (down 1.1%m/m or R7.8bn) which could reflect the repatriation of export earnings. There was also a large decline in the investments category (-R7.6bn in May), which relates to banks settling various inter-bank derivate exposures.
In contrast, mortgage credit rose by a more robust R5.4bn, which included an increase in commercial mortgages. On an annual basis mortgage credit is still up only 3.1%, which is consistent with the sluggish levels of activity in the residential and commercial property sectors.
Consumer credit increased by an encouraging 0.5%m/m in May or R5.1bn (+6.9%y/y). During the first five months of 2011, consumer credit has risen by a total of R29.15bn, which compares with R26.6bn during the corresponding period in 2010. Despite the rise in May, the rate of growth in consumer credit can still be considered very modest, 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 increased conservatism on the part of banks, retailers and consumers have combined to keep household credit growth well contained.
It is clear that the rate of expansion in private sector credit 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 has also 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 the fact the banks are no longer offering the ‘two-below-prime” deals they did a couple of years-ago.
We still expect credit growth, especially consumer credit, to move modestly higher during the next 12 months, as the combination of 30-year low interest rates, improved income growth, reduced debt servicing costs and the slightly easier lending criteria out of banks start to have a more positive effect.
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