Increasing Debt in SA households is "The Biggest Time Bomb"

Increasing debt in South African households and their excessive access to easy credit is “the biggest time bomb” facing the country, said Ismail Momoniat, a deputy director general at the National Treasury.

“I still see adverts for R150 000 ($11 000) personal loans — isn’t that reckless?” Momoniat said in a presentation at a banking conference in Johannesburg on Thursday. “We do want credit in the economy, but it can’t be right, all these personal loans.”

Paying debt swallows up about 78% of South Africans’ disposable income, according to the central bank. The economy has narrowly avoided falling into recession this year and the South African Reserve Bank has increased its benchmark lending rate four times since the start of 2014. Food inflation is set to more than double to exceed 10% by the middle of next year, according to economist forecasts, hitting poorest households, who spend a third of their money on meals, the hardest.

“We can’t say the current way we are doing things is right, because a lot of households are over-indebted,” Momoniat said. “Regulators need to be much more effective.”

Government officials were among those to link 2012 violence at the Marikana platinum mine that left 44 dead to workers feeling desperate about their debt. While the country’s biggest banks have since tightened their lending rules, African Bank Investments, the largest unsecured lender, collapsed in August last year. is among short-term lenders that stepped in to meet demand for personal loans not backed by assets as banks pull back.

Payday Lenders
“We see almost no role for payday lenders,” he said, referring to small, short-term loans that are sometimes recouped on the day the client gets paid. “We’ve said to the regulators that they’re not being tough enough. The banking sector needs to do much more to come to the party. Indebtedness is driving a lot of instability in our society.”
As inflation and interest rates climb and debt burdens intensify in a country where one in four is unemployment, frustration among South Africans over their economic plight could add to protests, Momoniat said. The risk of this unrest could be worsened if the government was seen by citizens to have failed to address corruption, he said.
“One of the long-term consequences can be that people start marching,” Momoniat said.
©2015 Bloomberg News