South Africa’s high interest rates over the past two years have raised the average debt cost burden to its highest level in 15 years.

This is according to the Altron FinTech Household Resilience Index (AFHRI) for the second quarter of 2024, compiled by economist Dr Roelof Botha, who highlighted the financial pressure many of South Africa’s households remain under.

“One of the most worrying trends in the latest AFHRI is the year-on-year decline of 3.3% in the ratio of household income-to-debt costs. Merely two years ago, in the first quarter of 2022, households were sacrificing 6.7% of their disposable incomes to pay for debt costs. This ratio has since increased by 36%, with households now having to spend 9.1% of their disposable incomes on servicing debt,” he pointed out.

At the end of 2021, the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) started following what Botha said was a “fundamentally flawed” overly restrictive monetary policy that led to a relentless increase in the official repo rate, which automatically feeds into the prime overdraft lending rate of the banks.

“South Africa’s prime rate was 7% at the end of 2021, but jumped to 11.75% in May 2023, where it stayed for 16 consecutive months, representing an unheard-of increase in the cost of credit (and capital) of 68%, based on the real prime overdraft rate,” he explained, adding that the unwarranted increases in lending rates have a stifling effect on demand in the economy, especially household consumption expenditure and new investment in productive capacity by the private sector.

The costs to the economy of the “overly” restrictive monetary policy stance by the MPC have been significant, he said, noting that had the debt cost servicing ratio remained at 6.7%, cumulative household disposable incomes would have been R172-billion higher, which, owing to the effective parity between disposable incomes and consumption expenditure, would have translated into an equal increase in total demand.

“Based on the fairly stable relationship between aggregate demand and taxation revenues, National Treasury would have pocketed an additional R42.9-billion – enough money to build 370 000 low-cost houses and create 244 000 jobs in the construction sector supply chain.”

The impact is seen in “virtually every" economic indicator, including negative per capita GDP growth and lethargic trends in indices such as the Afrimat Construction Index and the Drive.co.za Motor Index, as well as South Africa’s residential property market, which saw muted home buying, with the BetterBond Index showing home loan applications were down by 31%.

According to Botha, at least three fundamental flaws can be identified in the overly restrictive monetary policy approach of the MPC over the past two years, including inconsistency, a lack of understanding over the causes of higher inflation and undue importance given to inflation expectations.

He highlighted the average real prime rate of just above 3% and real GDP growth averaging 2.5% over a five-year period during the tenure of the previous Governor of the Reserve Bank Gill Marcus.

“Within one year of her retirement, the new MPC raised the real prime rate by 57% to a level of 4.9% and four years later, the real prime rate stood at 6%, an increase in the cost of capital and credit of 94%. It remains a mystery why the MPC decided to lift the prime overdraft rate to a level of 11.75% in the aftermath of the Covid pandemic, when it was 10% just prior to the Covid pandemic and also considered too high then by the standards set by the MPC under Marcus.”

Further, Botha commented that there was a lack of understanding over the causes of higher inflation immediately after the worst of the lockdowns imposed during the Covid pandemic.

He cited the spike in the consumer price index (CPI), which was mostly owing to three supply-side shocks, namely the increase of 720% in global shipping freight charges between the third quarter of 2019 and the third quarter of 2021; the 430% increase in the price of Brent crude oil between April 2020 and the beginning of 2022; and lower levels of capacity use in South Africa’s manufacturing sector, which increased fixed overhead costs per unit of production.

“Excess demand had nothing to do with the temporary rise in the CPI. By raising interest rates to record high levels, the MPC’s policy approach only served to reduce aggregate demand and restrict the ability of the economy to recover from the effects of the Covid pandemic,” Botha explained.

Another flaw was the undue importance given to inflation expectations, with Botha noting that apart from the fact that significant variations permanently occured between the results of quarterly surveys on anticipated future inflation and observed inflation, the samples for these surveys were minute and devoid of meaningful academic substance.

“Extensive research by Reid (2012 & 2021) has revealed that a relatively large number of respondents either declare that they have no knowledge of the subject or answer with ridiculously large numbers. The crux of the problem with using inflation expectations as a basis for conducting monetary policy has been succinctly stated by Reid (2021) with the following conclusion: expectations matter, but they are unobservable,” he continued.

Meanwhile, the country’s increasing unemployment rate should be of “huge” concern to government’s economic policy makers.

Since the fourth quarter of 2018, formal sector employment increased at a paltry rate of 0.1% a year, considerably lower than the average yearly increase in the labour force of 1.8%.

“Moreover, it is alarming that the number of unemployed persons, including discouraged job-seekers, has increased by 2.6-million over this period – threatening the ability of National Treasury to continue paying the so-called Covid grant, while also acting as a potential source of social unrest,” he commented.

“It is high time that the combating of relatively benign inflation is weighed up against the negative effects that high interest rates inflict on job creation and economic growth.”

“The latest AFHRI report is deeply concerning. Although the GNU has created expectations for growth among international and local investors, the persistent issue of unemployment is unacceptable,” said Altron FinTech MD Johan Gellatly, noting an urgent need to capitalise on the country’s growth mindset and support every sustainable initiative that attempts to create jobs.

“There is no quick fix. The indicators are clear, we require all hands on deck to actively reduce unemployment. South Africans have proved themselves to be remarkably resilient. They have managed to make ends meet, even when their disposable incomes are under dire pressure owing to sustained periods of extremely high interest rates.”

All indicators, including the AFRHI, point to the need to lower interest rates in order to start assisting consumers. This is equally important in terms of growing the economy, attracting investment and reducing unemployment.

“While a significant proportion of Business South Africa is sitting on the sidelines and playing a ‘wait-and-see’ game to ascertain whether they should invest or not owing to the tight monetary policy, at Altron FinTech we are constantly applying our minds with our customers on how best we can use the resources at our disposal to grow our businesses and assist consumers by introducing cost-friendly products and services.”

The second-quarter AFHRI also indicated some positive trends among key constituent indicators, including that private-sector employment increased by 459 000 since the second quarter of 2023.

“With interest rates bound to be lowered further in November and early in 2025 and the Government of National Unity now engaged in a closer relationship with business leaders in the private sector, the prospects for further employment gains have improved,” Botha added.

Following a lengthy period of decline, the index also showed that real levels of labour remuneration in the private sector have increased, both on a quarter-on-quarter and year-on-year basis.

Further, the AFHRI highlighted that the rise in the value of unit trust assets, which serves as a proxy for potential investment income for many households, is bound to increase further in the second half of the year, mainly as a result of the recent new record for the JSE all share index.