Nedbank CEO Mike Brown says consumers continue to face financial strain amid a series of own goals in the country's energy and logistics infrastructure.
Speaking to Business Times this week after the release of the bank's interim financial results for the six months to end-June, Brown said load-shedding, crime and logistical challenges had piled pressure on consumers.
We are seeing increasing bad debt as a result of the very weak economic environment here in South Africa combined with the effects of high levels of inflation and the resultant 475 bps of interest rate increases since October 2021. Some of these pressures are as a result of what we see globally but a large portion of what we see here in the weak economic environment in South Africa is as a result of self-inflicted own goals, particularly related to infrastructure breakdowns in energy and logistics,” he said.
The challenges around load-shedding, transport and logistics, and crime and corruption had a knock-on effect on consumer confidence.
“As a result of all of those, we have seen inflation increasing by more than people expected and interest rates increasing more than people expected.”
Interest rates have risen sharply since October 2021 when the repo rate was 3.5%. The central bank paused its tightening cycle in July, leaving the repo rate unchanged at 8.25%.
Brown said consumers in the group's retail and business banking segment were hardest hit by increases in the repo rate.
"What we are seeing is that that is putting a lot of strain into what we would call the consumer segment in retail, that is middle market South Africa and entry level South Africa in banking terminology."
So those individuals have seen an environment over the last 12 months where on average their income levels have increased by around 5% but at the same time, they have had an 18% increase in their home loan instalments, a 10% in their vehicle finance instalment and they have had a 16% increase in groceries and about an 8% increase in educational expenditure.
All of that has put cashflow pressure into the consumer segment, and that has caused higher levels of arrears."
Nedbank recorded a 57% surge in the impairment charge during the six months to June in the segment, and Brown said consumers were in for further pain in the coming months.
"We expect it to remain a very difficult time for the consumer segment of the retail population, until such time as inflation reduces further, and thankfully it has started to reduce so that should provide some relief, and ultimately this translates into a reduction in interest rates which we think will only be in the middle of next year," said Brown.
Last month Absa also flagged an expected jump in impairments as a result of significantly higher interest rates.
"The economy is estimated to grow this year at 0,3%, which is below population growth meaning on average all South Africans are becoming poorer as GDP per capita falls"
— Nedbank CEO Mike Brown
Brown said more effort was needed to grow the economy and build consumer confidence.
"It is a very difficult environment for consumers when inflation is high, interest rates are high and the overall economy is simply not growing. The economy is estimated to grow this year at 0,3%, which is below population growth meaning on average all South Africans are becoming poorer as GDP per capita falls. That is why it is so urgent that we accelerate structural reforms in our country to lift economic growth rates, and indeed enable people to improve their wealth," he said.
Food inflation peaked at 14.4% in March, given the weaker rand and the impact of load-shedding on production costs. However, inflation is easing, with the June headline inflation print at 5.4% — in line with the central bank's target range for the first time since April 2022.
Deloitte's latest state of the consumer report for June said: “While the broader inflation concern remains high, the percentage of South African consumers expecting prices to continue rising has slightly decreased compared to the past year. Inflation concerns are still arising from major categories such as groceries, clothing and alcohol.”
In its report for the first quarter of 2023, consumer credit card reporting agency TransUnion said consecutive increases in the repo rate showed signs of potential strain on consumers' ability to repay their debts.
Brown said South Africa needed to work as quickly as possible to get off the Financial Action Task Force (FATF) greylist, and Nedbank was working with other banks, the National Treasury and the government to address this.
“The main reasons we were greylisted have to do with our weak crime investigation and prosecution environment. There was very little to do with the greylisting that had anything to do with our financial services environment, which is a small positive inside the overall negative of a greylisting.
“The work that is being done to address what is required in the financial sector is progressing well. The work that is required in the crime and crime investigating environment is progressing slowly and needs to be accelerated.”
In February the FATF placed South Africa alongside Nigeria on its list of greylisted countries for not fully complying with "international standards around the prevention of money laundering, terrorist financing and proliferation financing”.
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