As the Rate Climbs – Bloated with Debt, Starved of Savings - Quick Consolidation Loans

As the Rate Climbs – Bloated with Debt, Starved of Savings

As the Rate Climbs – Bloated with Debt, Starved of Savings

Theory vs. Practice

In theory, the upcoming repo rate hike should see consumers save money via improved returns.

However, in practice, an interest rate hike will overstretch indebted households, leaving them with little to deposit into savings accounts, after meeting monthly debt obligations.

At under a sixth of GDP, we are considered among the worst savers in the world, making it hard to believe that the South African economy is Africa’s most advanced.

Apartheid and the Credit Market

After the dawn of democracy in 1994, banks proceeded to soak the financial industry with low-cost credit, after cutting the black majority out of the credit market for 50+ years of Apartheid.

Insatiable consumer demand ensued, leaving households financially crippled and 78% of the average disposable income swallowed up by debt.

The Status Quo

In July 2015, the central bank raised interest rates by 0.25% up to 6%, advising that more hikes would be on the way for the purpose of curbing inflation.

Subsequently, commercial banks have increased consumer interest rates, benefiting those with personal savings, but putting added pressure on those committed to 12% interest on mortgage, car finance and credit card payments.

Moreover, 1 in 4 South Africans are unemployed, which means the pool of savers is further drained of millions of people.

Savings Rate and GDP

Our national savings rate is 15.5% of GDP, whereas investment in the economy is at +/-20%, leaving a 4.5% or R175 billion gap for foreign investors to capitalise on. However, enticing foreign investment is another story altogether.

In comparison, China’s national savings rate is at +/-50%, India’s is at 34% and Russia’s is at 20%.

Obstacles to Investment

Last week, Moody’s pointed the finger at our low savings and investment rates as obstacles to the advancement of our credit rating. Even so, South Africa’s local savings market hardly inspires a culture of savings.

With inflation at 5% and deposit rates at 4 – 4.5%, capital actually dwindles when deposited into a savings account. Savings options that beat inflation are on offer at domestic banks, but the problem is that South African consumers are inclined to avoid long-term options for reasons unknown.

Perhaps, we should all start prioritising savings by shopping around for the best inflation-beating savings products on the market, instead of racking up more debt.