The repo rate in South Africa is set to remain at 8.25% until May, based on higher-than-anticipated inflation for February 2024. This has led to concerns about the possibility of a rate cut, as middle-class South Africans spend an estimated 73% of their income on debts and other fixed-cost expenses. The South African Reserve Bank (Sarb) governor Lesetja Kganyago has stated that the bank will only change policy once inflation is sustainably at 4.5%, with expectations now that it will slow down and average 5.1% this year and 4.6% in 2025.
Economists now expect the first 25 basis points to cut to 8.00% only in the second half of the year on the back of a rise in annual consumer inflation to 5.6% in February from 5.3% in January and 5.1% in December. South Africa's repo rate is expected to fall to 7.5% in November, loosely translating to three consecutive meeting cuts from July to the end of the year.
Neil Roets, chief executive of Debt Rescue, warns that a worrying trend has developed where consumers are turning to credit to purchase groceries at larger supermarkets. This sets a dangerous precedent among consumers battling to fulfil their debt obligations. Middle-class South Africans now spend an estimated 73% of their earned income servicing debts and other fixed-cost expenses, leaving just 20% to buy food, medicine, petrol, transport, and other daily necessities.
The combined credit loss ratio for the big four banks (Standard Bank, First Rand, Absa, and Nedbank) increased to the top end of their through-the-cycle ranges at 102bps as their combined income statement credit risk charge increased 26.6% from R42.5-billion in the 2022 financial year to R53.8-billion in the 2023 financial year. Total non-performing loans increased 21%, comprising 5.4% of gross loans and advances. A bank's credit loss ratio measures the amount of credit losses it experiences relative to its total credit exposure.
Standard Bank reported an increase of 22% in credit impairment charges to R16.3 billion, driven by new loan origination, client strain driving partial payments, negative sovereign risk migration, and new defaults. Standard Bank's credit loss ratio increased from 83 basis points in the 2022 financial year to 98 basis points in the last year, at the top of the group's through-the-cycle credit loss ratio target range of 70 to 100 basis points.
Absa reported that credit impairment charges climbed 13% to R15.5 billion for the year to the end of December 2023, with Absa's credit loss ratio increasing from 96bps to 118bps, exceeding Absa's through-the-cycle target range of 75 to 100bps. Non-performing loans increased to 6.05% of total gross loans and advances due to elevated inflows into later-stage delinquencies in the South African retail portfolios.
Nedbank's credit loss ratio for the year to the end of December 2023 increased to 109bps, above its 60 to 100bps through-the-cycle target range. However, the bank remains adequately provided even as total expected credit loss coverage increased to an annual high of 3.62%.
SOURCE: Daily Maverick
