Time for SA consumers to tighten belts and avoid debt

The recent increase in the repo rate, combined with steep increases in fuel and energy prices, points to a torrid time ahead for South African consumers – but the short-term discomfort should pay off in the long term, says employee benefits advisor firm NMG Benefits.

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It sounds counter-intuitive to ordinary consumers struggling to balance their budgets, but the recent series of increases in the repo rate are designed to keep inflation at bay in the broader economy, says NMG’s Head of Investments, Raazia Ganie.

While consumers will be constrained for now, the longer-term effect is that they end up spending less. In theory, this means demand for goods goes down and prices are brought back in line in response to supply and demand principles. Now, however, external factors like the Russia/Ukraine war mean the normal tools that the central bank uses to manage inflation – in the form of monetary policies – may not be as effective.

One of the immediate effects of the cycle of increasing interest rates is that households that have debt will now have higher debt repayments to make. This raises the risk that highly indebted consumers will start defaulting on their debts. The flip side is that those who have excess funds will save more, as they will earn more interest on their savings.

Photo of Raazia Ganie, Head of Investments, NMG Benefits
Raazia Ganie, Head of Investments, NMG Benefits

“Right now, our advice to all consumers is that they should aim to pay off their debts as quickly as possible – and where they are in difficulty, they should seek help and debt counselling immediately. They should also avoid taking on new debt, or even worse, taking on additional debt to pay off debt, as this will lead to a slippery slope which will be hard to recover from,” says Ganie.

The current economic climate is particularly worrying for those nearing retirement. The five years before and after retirement are often referred to as the “fragile decade”, as any economic setbacks could have a significant impact on a consumer’s retirement funds and their ability to make up for any market losses in their portfolios. If they have already started drawing on their retirement funds, the withdrawals and the tough market could deplete their funds account faster than planned.

“If you are approaching or already in retirement, this may be a good time to reach out to your financial advisor to revisit and reassess your retirement plan,” advised Ganie. “Those who are five years or more from retirement should remain invested but consult their advisors to get a holistic view of their commitments and assets and work out the best strategy for their circumstances. This is not the time for hasty decisions: knee-jerk reactions during times of market turmoil usually lead to sub-optimal outcomes.”

One bright spot in the turmoil is that retirement funds are now compelled to allow members to leave their assets in the fund after they retire or resign. This offers members who have the means to do so the opportunity to benefit from the lower institutional fees offered by retirement funds while their investments recover from the current volatility.

The increased interest rates will also hit local businesses hard, as they could find it harder to obtain or service loans, which could limit their growth. As is the case with consumers, though, businesses with excess cash will benefit from putting their money in higher yielding investments.

For investors, the effects of the interest rate hikes vary. Most investors will have diversified holdings of instruments across multiple asset classes such as equities, bonds cash and property – all of which would react differently to the interest rate changes.

“Markets are volatile now, with the Ukraine conflict, global interest rate hikes and higher inflation causing uncertainty. During times of market turbulence, it is best to stay the course and not make any impulsive changes due to market movements. Your professional portfolio managers will continue to evaluate the opportunities on your behalf and make changes as these become available,” says Ganie.

Banks are generally among the businesses which benefit the most from higher interest rates, while companies investing in luxury goods may struggle as consumers cut back on discretionary spending. Goods with inelastic demand, usually staples, will continue to see regular demand levels, says Ganie.

“However, this is under normal circumstances. Right now, the world is essentially being held to ransom for food and energy. Essential inputs into many staple foods have seen significant price increases, which are being passed on to consumers. This becomes a vicious cycle as consumers are already highly indebted and struggling to keep their heads above water,” concludes Ganie. “Hopefully, as the situation in Ukraine normalises, we will see relief for consumers, but when this may occur remains highly uncertain.”