July 2008

Has the National Credit Act helped or not?

Consumer indebtedness has sky-rocketed with consumers now spending almost 80% of their disposable income to service debt – at the same time the amount of motor vehicles, homes and furniture being sold has dropped noticeably. The question everyone is asking is: has the National Credit Act (NCA) helped or hindered?

According to Pule Mokoena, Group Executive at Innovation Group, a leading business process consulting and administration company - and the South African subsidiary of London-listed global business outsourcing organization, Innovation Group plc – the new legislation is definitely putting the brakes on consumers’ ability to access credit and speed freely. “Right now South African consumers owe more than R1 trillion and their ability to service this debt is coming increasingly under pressure. Banks are also feeling the credit crunch, with FNB home loans recently announcing staff cuts along with insurance company Mutual and Federal, which says it is centralising much of its operations.

“FNB is already on what it calls ‘recession watch’ and a number of analysts are saying that the country will head into an official recession during October, or by the end of the year. While the NCA has reigned in consumer spending, which arguably needed to be done, the ramifications of the act – together with interest rate hikes and increases in the interest rate, food and oil – seem to have conspired to push consumers against the wall. In the final analysis, it might be that the NCA has precipitated a bad-debt ‘bubble’” said Mokoena.

Innovation Group is active in business sectors that include the motor, insurance, retail and financial services sectors.

It certainly seems that a year after the National Credit Act (NCA) was launched, consumers have fallen on hard times and businesses, especially smaller ones, are also starting to feel the pain.

Christopher Riley, MD of notebook and accessories retailer, The Notebook Company, (www.notebook.co.za) was, until earlier this year, predicting a 15-20% rise in laptop sales for the 2008 calendar year. This prediction was made in the second quarter of 2007. However, as the credit crunch emerged, this sales prediction was reduced. Riley now believes sales figures will be flat – and may even decline. “People are feeling the pinch and a growing number are opting to upgrade their laptops where possible, rather then buying new ones. So, while we are seeing our sales of new laptops being dented, our upgrade business has seen quite a spurt.”

Riley believes the NCA has, to a large extent, protected the consumer from unscrupulous lending practices, but the ‘downstream’ affects are having a negative affect on business confidence and on the economy as a whole.

Karen Geldenhuys, MD of ICT-focused recruitment company, Abacus Recruitment, said that while the ICT industry always seems impervious to economic downturns, there is an “increasing chance” that retrenchments will soon be the “order of the day” in many business sectors, including the banking, mining, clothing and textiles, motor and retail industries. “This is despite a dire skills shortage in the country,” she said.

Geldenhuys said that last year the economy created around 30 000 new jobs per month in the formal sector, adding that this had dwindled significantly. “Now we are looking at 8 000 – 10 000 per month, if we are lucky – and this might turn into a negative growth.”

Economic statistics are looking dire: since last year car sales have dropped by more than 28%; mortgage advances, once growing at an impressive 31%, have slowed to 21,9%; and credit-driven furniture and apparel sales are almost flat.

On a positive note, the Innovation Group’s Mokoena said that while the NCA has added to the financial stress consumers are currently feeling, it has at least put consumer indebtedness under the spotlight. “This needed to be done,” said Mokoena, “consumers could not have carried on spending as freely as they were before the NCA was introduced. It is important that people start reducing debt – and it is better that they face the pain now, rather then later. Ultimately consumers will be better off – as well as the economy.”

But, whether consumers will actual cut back effectively on spending remains to be seen. Although credit extension has reduced form the October 2006 peak of 27,5%, demand – despite the NCA – seems to be on the increase in some quarters. Figures released recently show that credit extension increased to 19.7%, higher then in May last year.

Commenting in Financial Mail, property economist Erwin Rode said: "The NCA will save South Africans from themselves. It was a [mistake] to think that people's lives could be improved by shoving expensive credit down their throats. Instead, the NCA will enforce moderation in credit granting and impose a measure of discipline on consumers, which will save us from the sub prime crisis prevailing in the US."

Market research shows that the market for consumer credit grew from R340bn in 2002 to R640bn in 2006 to R1,1 trillion at the end of 2007 with little sign of slowing, according to the National Credit Regulator.

The most recent figures available show almost 7m South Africans were in arrears on one or more accounts in September last year.

“Clearly,” said Mokoena, “something needed to be done to dampen consumer spending. Indeed, it is very likely that the NCA and the government’s strong stance on credit did a lot to ensure that the South African economy escaped much of the sub-prime mortgage crisis that has almost crippled many banks and financial institutions in the USA and Europe. Sure, house prices – and new house mortgages - are down; but at least we don’t have the additional problem of staring into the storm of a sub-prime mortgage crisis.”