Credit Driven Consumption

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Growth in demand for credit by South Africa's private sector slowed in December 2006, which has led some analysts to the conclusion that the central bank may not hike interest rates in February, as had been previously forecast.

On January 30, the Reserve Bank released data on private sector credit extension (PSCE), which indicated that PSCE was down to 25.81% in December 2006 compared to 26.77% in November 2006.

The higher figure represented near record levels of credit growth, while household debt was at an all-time high 73% of disposable income.

Recent high consumer consumption, which showed little immediate signs of abating, had led to inflationary pressures. Inflation was recorded at 5.8% (CPI) in December 2006, which was up by 0.4 of a percentage point compared to November 2006.

Tito Mboweni, the governor of the reserve bank, has repeatedly insisted that consumers cut back on their levels of spending and indicated that consumer spending is taken into account when deciding on interest rate adjustments.

Since June 2006, Mboweni and his team have raised its key repo rate by 200 basis points to 9% in four stages to try to tame inflation created by consumer spending and to keep inflation within the target range of 3-6%.

Despite the fact that interest rates are now two percentage points higher than they were this time last year, there has been a pervasive lag between the implementation of rate hikes and reduced consumer spending. The average interest rate charged by commercial banks to borrowers is currently 12.5%.

The Reserve Bank's monetary policy committee (MPC) meets every two months to decide on rates, with the next meeting due to take place on February 14-15.

Retail sales have served as a key indicator of overall consumer demand and spending in South Africa. This spending has served as a propeller of economic growth in the country over the past few of years.

Statistics South Africa recently reported that retail sales were up by 12.3% year-on-year in November, at constant prices, from a downwardly revised 8.7% in October. December was a strong month for food, home-ware and clothing retailers, which have all reported healthy gains of up to 35% in merchandise sales.

Much of this credit driven spending can be attributed to tax cuts, relatively low interest rates until recent hikes and a rapidly growing black middle class.

Specific contributors to the growth in PSCE were mortgage advances, which were up 30% year on year in December and the extension of loans and other advances, including credit cards and cheque overdrafts, which were up by 31.3% year on year.

Cees Bruggemans, chief economist for First National Bank, told OBG that the country was more likely to see reduced spending in 2007, because the Reserve Bank increases were implemented gradually rather than at one time. He also pointed to slowing car and property sales as key indicators of lower consumer purchasing power.

In addition to the reserve bank monetary policies, the government hopes the pending implementation of legislation such as the National Credit Act, which is aimed at curbing irresponsible lending to consumers, will reduce credit driven consumption.

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