As South Africans continue to over-spend a changing global economic environment is likely to worry investors about the narrowing market opportunities and consumer spending capacities.
South Africa has, in the past years, been an attractive investment location in part due to its consumer spending capacities, monetary stability, and market growth. However, South Africa’s economic growth and market opportunities for investors may be hindered in the short to medium term by rand depreciation and consumer debt accumulation – both intimately intertwined with South African over-spending.
According to the 2013 report by National Credit Regulator, consumer spending trends in South Africa are surpassing their living means. It revealed that almost half of the country’s 20 million credit-active consumers have fulfilled their spending needs by taking loans. Moreover, most South Africans have struggled with terrible debt, using about 76 per cent of their income towards repayments (an increase from 50 percent in 2003).
At the same time, the continued capacity of spending has been supported by South Africans not taking advantage of low interest rates in the past to reduce their debts and instead getting comfortable solving their ‘money’ and ‘want’ issues through additional loan accumulation. These trends are particularly concerning taking into account the recent depreciation of the rand.
In the past years, a combination of low interest rates, government stimulus, unsecured lending and cheap foreign funding has created a gap between domestic income (GDP) and spending (GDE) with South Africa’s domestic import becoming significantly higher than domestic production and the account deficit reaching 6 percent of the GDP (R200 billion).
While South Africans have consumed more than the country produces, the account deficit has been largely covered by borrowing and foreign investment through bond and equity flows, allowing South Africa to keep its consumption and market capacities above its actual means to the tune of R200 billion.
Such inflows from advanced economies to emerging markets could be in part attributed to the unintended consequences of monetary policies after the credit crisis of 2008/2009, which made emerging economies an attractive destination.
However, partly due to the major global banks crediting about 7 trillion USD in liquidity, homeowners have finally witnessed housing equity exceeding mortgage debt in the second quarter of 2013 in developing markets. The now fading austerity measures have once again shifted some of the investments back to the developed economies.
For instance, the decision by the US Federal Reserve to start tapering, meaning the US would reduce the pace of their purchasing of assets to improve the conditions for domestic economic growth, has affected South Africa’s economy since mid-2013.
With the investment flows and foreign investors taking some of their money out of South Africa and foreign funding becoming scarce, the gap between GDP and GDE (funding of the current account deficit) continues to grow. As a result, the rand has had to serve as a shock-absorber since late 2013.
The emerging gap between South Africa’s actual capacities and spending needs has recently led to depreciation of the rand to partially fund the account deficit.
Potential pitfalls for investors
While there are those who may welcome the depreciating rand, especially export businesses and property buyers, the combined trends are also invariably affecting investors’ opportunities in South Africa.
Given the current uncomfortable account deficit coupled with the decreased appetite for emerging market assets, it is difficult to see the rand appreciating significantly from the current levels anytime soon. It is more likely that the deteriorating local economic landscape, negative sentiment related to labour strikes, and high unemployment may actually further contribute to rand depreciation, which has already seen the largest drop among emerging markets.
In addition, as consumers are struggling to keep up with their debts, yet continue to borrow money from banks to live above their actual means, the costs of basic goods are likely to rise if the rand depreciation increases. Higher commodity prices as a result of pressure such as rand weakness may, in turn, affect consumer ability to absorb the rise in the costs of living.
Considering the high levels of debt among consumers, weak private sector employment opportunities and a slow growth of real disposable income, it is likely that the purchasing capacities of South Africans will decrease significantly in the short to medium term.
These trends may suggest a bleak and volatile period of 2014-2015, with consumer habits dramatically changing and the opportunities for investment returns narrowing, especially in terms of commodity markets.
While South Africa is currently walking the tightrope as it tries to balance its capacities and its needs, it is very likely that its current behaviors will significantly reduce the competitiveness of its domestic markets for investors.
