1. Prof Bernadene de Clercq Bureau of Market Research, UNISA May 2014

2. Overview Economic environment during Q1 2014 Definition and Background to index Measurement CFVI Q1 2014 results and analysis Debt servicing Concluding remarks

3. Economic environment Q1 2014

4. World economic growth is expected to increase to 3.6% in 2014 from 3% in 2013. – Due to improved conditions in developed economies – US growth above trend (IMF). China’s economic growth slowed to 7.4% in Q1 2014 – slowest rate since Q3 2012. Risk of possible deflation / very low inflation in Europe due to weak economic activity. Ukrainian / Russian geo-political tensions remain problematic.  Impact on South Africa: – Exports under pressure – could impact job creation and household income – International capital flows – rand weaker – pressure on inflation – impacting buying power of consumers  Imbalances in personal finances through knock-on effect of income impact on expenditure, debt servicing and saving capabilities International economic forces

5. Electricity supply shortages remain – Impacting domestic production and sales, job creation. Weak exchange rates during Q1 2014 (21.5% weaker against USD than in Q1 2013) – Recent strength provides relief, but remains volatile and vulnerable to domestic and global sentiment. – Affects inflation, purchasing power of income, but may stimulate exports and job creation. Continued labour strikes in platinum mining sector – Strikers do not earn income while on strike and rely on transfers and expensive credit to finance expenses. Interest rate increase and higher consumer price inflation – SARB increased the repurchase rate by 50 basis points in January 2014. – Possibility of additional increases. Domestic economic factors impacting financial vulnerability

6. Economic growth expectations for South Africa scaled down - IMF expects 2.3% growth for 2014 (WEO, April 2014), compared to previous forecast of 2.8% (Oct 2013). Outlook for household finances are expected to be constrained by slow employment growth (seasonally adjusted unemployment rate 25% in Q1 2014 from 24.7% in Q4 2013), high debt levels of consumers, slow rates of growth in credit extension and the higher interest rate environment.  Consumer finances to remain in risky territory. Bleak outlook to also impact financial vulnerability

7. CFVI Q1 2014 Results and analysis

8. Definition and background to index CFVI launched in Q2 2009. Consumer Financial Vulnerability (CFV) is defined as: – being financially affected to such extent; – that it creates an actual experience and/or sense; – of being financially insecure and/or an unable to cope financially. The Consumer Financial Vulnerability Index (CFVI) reflects consumers’ sense/experience as to the state of their cash flow position, which constantly is influenced by macro- and micro- economic factors. Comprehensive consumer finance indicator as it gauges the individual components of consumer finances separately and in one composite index. – Income – Expenditure – Savings – Debt servicing

9. Measurement Financially secure 80 - 100 Extremely secure Cash flow position is under control with little threat of becoming financially vulnerable. 60 - 79.9 Very secure Financially exposed 50 - 59.9 Mildly Exposed Cash flow affected to such extent that it creates a high risk of becoming financially vulnerable/secure. 40 - 49.9 Very Exposed Financially vulnerable 20 - 39.9 Very vulnerable Cash flow affected to such extent that it creates an actual experience or sense of being financially insecure and unable to cope. 0 - 20 Extremely vulnerable

10. Overall CFVI During Q1 2014 consumers remained mildly exposed to risks that affect their financial vulnerability. Overall score of 50.2 points just above very exposed category.

11. Consumers experienced tougher conditions in terms of income, expenditure and debt servicing. DateSavingsExpenditureDebt servicingIncomeOverall CFVI Q1 201258.860.156.657.658.9 Q2 201247.553.847.844.848.6 Q3 201242.154.448.146.847.9 Q4 201248.752.352.247.250.1 Q1 201349.651.054.049.651.1 Q2 201344.852.453.843.446.7 Q3 201344.845.251.642.145.9 Q4 201349.953.553.751.352.0 Q1 2014 50.2 ↓ 52.9 ↑ 46.6 ↑ 51.0 ↑ 50.2 ↑

12. Income vulnerability impacted by seasonal employment Employment: – 497 000 more employed in Q1 2014 vs Q1 2013, but 122 000 fewer employed vs Q4 2013. – Seasonal worker “retrenchments” (in construction and trade) in Q1 2014 should negatively affect consumer income.

13. Income vulnerability impacted by seasonal employment and strikes Employment in mining sector: – Due to strikes of some 80 000 workers, their households are without such income earning abilities. – Direct impact on total income is relatively small (less than 1% of total employed), but spill-over effects are large (mining profits, suppliers, retailers, manufacturing). – Seasonal analysis of employment in the mining sector showed that on average more individuals are employed in Q1 and Q2, while less are employed in Q3 and Q4. – A change in this pattern should emerge for Q1 2014 because of strikes. – Income loss thus not only to strikers, but also seasonal mining workers.

14. Income vulnerability affects expenditure Expenditure impacted by: – Increasing income vulnerability; – Higher inflation, also impacting volumes purchased; Marked upward trend (latest 6.0% recorded for March 2014) Main contributors were transport costs (mainly petrol and maintenance) [8% growth, contributing 16.7%] and food prices [5.6% growth, contributing 14%] Petrol prices (93 octane) have increased by R1.14/litre during Q1 2014 – Credit restrictions. – Income, inflation and credit restrictions affected YoY retail sales growth that increased only 2.2% in February.

15. Debt servicing vulnerability

17. Household liabilities (R1 572 billion in Q4 2013), of which credit is the largest component, remained high in 2013 relative to household disposable income (75%). However, the pace at which credit is granted to households moderated further (5.2% YoY growth in Q1 2014 vs 6.2% in Q4 2013). Due to among others the pressure on income and expenditure, stricter credit granting criteria and higher interest rates, consumers struggled to service their debt. Debt servicing under severe pressure in Q1 2014

18. Changes in credit environment Lending practices have become stricter - more applications for credit are rejected. 2007 Q42010 Q42013 Q4 % applications rejected41.3%43.2%57.4% Growth in total debtors’ book has slowed during 2013. Consumers repay larger portion of debt - place expenditure under pressure (Larger part of income used to repay debt).

19. Types of credit Annual growth in credit granted slowed during 2013 Only mortgages recorded higher year-over-year (YoY) growth during 2013 Unsecured credit declined 25.65% (YoY) in Q4 2013

20. Debt servicing costs Debt service costs as ratio to disposable income stabilised at 7.7% in Q4 2013 (South African Reserve Bank). Debt service costs up R11.9 billion between Q4 2012 and Q4 2013 amounting to R162.6 billion (seasonally adjusted and annualised in Q4 2013). Debt service costs due to increase further as a result of increase in repo rate.

21. Conservatively, the increase of 50 basis points in the repo rate increased debt servicing costs by R8.4 billion, or R700 million per month (at current debt levels). Should debt levels remain unchanged, another increase of 50 basis points will increase the debt servicing costs by R16.2 billion (combined impact of 100 basis points increase). However, should liabilities increase only 5% in 2014 and the repo rate by 100 basis points, total debt servicing costs will increase by R25 billion to R183 billion. This will cause severe hardship among especially low income earners. Impact of change in interest rates on debt servicing

22. Who carries the debt burden? New credit vs debt servicing cost Debt servicing costs may be higher due to NCA’s prescriptions on maximum interest rates that may be charged on different types of credit. Individuals in higher income categories (earning above R180 000 per annum) obtain the largest share of new credit (more than 70%) and therefore are responsible for a large portion of debt servicing costs. Individuals in lower income categories (earning below R66 000 per annum) share disproportionately debt servicing costs as they borrow at higher interest rates.

23. Concluding remarks

24. Due to volatile macroeconomic circumstances consumers remain financially vulnerable. Consumers felt financially very exposed in terms of debt servicing capabilities during 2014 Q1. An increase in interest rates have a greater impact on the lower income groups as they carry the debt burden disproportionately (they also have the largest share of credit accounts). Lower income groups therefore struggle financially as they are most likely to default on excessive debt, their income is limited and cost of making a living is high – policy changes need to consider the impact on these consumers.

25. Thank you

26. Who carries the debt burden? New credit vs debt servicing cost