Reana Steyn, the Ombudsman for Banking Services
Many South Africans face the prospect of a tough 2023. Inflation is the highest it has ever been, and the repo rate has steadily risen with more increases expected soon.
Further stress is applied to most consumers through (regular) significant increases in both petrol and diesel prices which not only impact car owners but also have a knock-on effect on the price of other items such as food and transport.
All these increases have negated the financial relief initially offered by the rate reductions of 2020. Our concern is that South Africans are now feeling the brunt of these increases, with rising living costs eventually influencing the number of consumers forced to default on their debt payments. Increasing numbers of defaulters may in turn increase the number of creditors instituting legal action for the foreclosure/repossession of financed goods.
Rising interest rates
While there has been a significant decrease in interest rates since the 2008 GFC – where interest rates were close to 12%, consumers have had to endure a year where the interest rate has risen significantly over a very short period.
Statistics from the South African Reserve Bank show that in December 2021, the interest rate was 3.5%; this has steadily increased throughout the year to its current levels of 6.2%.
This is unwelcome news for many South Africans who are paying off bonds and vehicle finance agreements. Further, statistics show that many South Africans are borrowing money to get them to the end of the month. Without a workable plan in place, there will be increased instances of South Africans defaulting on their credit payments which puts them in a compromising position.
The pockets of many South Africans are also under threat from regular increases in the price of petrol. While there have been some reductions in the fuel price, this may not continue later on in the year as many countries around the world continue to face an energy and supply chain crisis unlikely to end in 2023. The implications of this include a further reduction in oil availability and a potential surge in crude oil prices.
Rising fuel costs
Oil is a key component of petrol. With South Africa being a net importer of petrol, the country bears the brunt of any increase in the oil price. Statistics show that the price of inland petrol has increased significantly over the past decade, with the price moving from just R10,65 per litre in 2012 to its current high of R24.99 in 2022.
For many South Africans, this is worse than rising interest rates. Not only does the fuel increase impact consumers directly, but these increases also exert an indirect impact on both food and clothing prices as well.
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Moving towards a common goal
Many South Africans will be feeling a sense of dread as they are forced to come to terms with their own potential financial crisis. However, studies show that the way that you approach this issue helps determine the probability of overcoming the problem.
Managing this crisis will cause a lot of stress within households. Partners and families need to come together and formulate a plan to address their financial needs. They need to draw up a monthly budget, make provision for emergency savings, and they then need to sit and look at their monthly expenditure, making cuts where necessary. This is the first step towards addressing this crisis.
Approaching credit in a financial crisis
Many South Africans are using debt to manage the worst effects of the crisis. The latest information from RCS Loans shows that South Africans are saving on average -0.3% of their salary per month. This means that the vast majority of South Africans are not saving but borrowing to make ends meet at the end of the month.
This is problematic for obvious reasons. However, there are some instances where South Africans are left with little choice but to turn to debt. In these instances, the OBS encourages South Africans to use reputable credit providers and avoid loan sharks. Loan sharks are notorious for charging extremely high interest rates which will take years to pay off. Consumers will battle to get out of this cycle and must borrow increasingly, causing them to go into a debt spiral.
All South Africans are in the same boat when it comes to the financial pressures associated with the current financial crisis and those who are struggling to repay their debts (or anyone who foresees that they will not be able to pay their debts soon) should urgently contact their credit providers to seek assistance. This may be the difference between keeping possession of your assets or having them repossessed and, while not ideal, making alternative arrangements may be the only way to avoid having a judgment and an impaired credit profile in your named.
Over the years, the OBS has found that most banks are open to offering some form of assistance to customers who find themselves in financial difficulty. Customers should be open about their situation and to timeously communicate their financial problems with their banks and advisers. It is our experience that banks will explore multiple options to find the best possible solution tailored for the specific issue faced by the customer.
There are several payment options offered by banks with the aim of rehabilitating the account in arrears or minimising the losses for the customer and the bank in the event of a rehabilitation not being possible.
Good news that the Ombudsman for Banking Services takes an interest in consumer education in a proactive way. Her comments are increasingly relevant to consumers across the income spectrum, as interest rates increase, and economic growth is stifled.
Financial advisers should see this as an ideal opportunity to show their true value, not just in creating secure financial futures for clients, but also in assisting those who got mauled by this perfect financial storm.