Could debt lenience lead SA into a financial crisis?
Back in 2008, the US found itself in a financial crisis comparable to the Great Depression. At this tender time in the South African economy, with fluctuating markets and political uncertainty clouding the nation, could the poorest South Africans be led into financial demise?
Cyril Ramaphosa has been elected president of the ANC and the country, but the rand has been trading as if Zuma has been out of office for some time. Since 24 January, the rand has been at a level last seen in February 2015, trading below R12 to the dollar. Economic analysts believe that having Ramaphosa in office will have a positive effect on SA’s global credit ratings. So things are looking pretty good for SA’s economy.
But, is it really?
Political parties are scrambling to get as much leverage as they possibly can ahead of the 2019 elections. The timing of the draft National Credit Amendment Bill is worth noting. With more than 10-million South Africans struggling to service their debt, it appeals to the masses. The bill would permit a person earning less than R7,500 and owing less than R50,000 in unsecured debts to apply to the National Credit Regulator (NCR) for debt intervention.
If the NCR finds that the applicant is, in fact, in need of assistance, the National Credit Tribunal can suspend credit agreements in part or in full for 12 months. Thereafter, if the consumer’s financial circumstances do not improve, all or part of the qualifying credit agreements can be extinguished.
In essence, if the applicant is unable to make payments, their debt will be written off. Whether this is a political ploy to win votes ahead of the 2019 election, or whether the government’s purpose is to eradicate the burden of debt on the country’s most vulnerable, we will never know. However, what we do know is that this particular plan is reinforcing bad credit behaviour by rewarding over-indebted, credit-active South Africans with an easy way out.
Similarly, with the 2008 financial crisis in the US, banks allowed those with questionable credit to take out 100% loans against the value of their homes. This caused one of the biggest financial crises the US has ever seen, with a rise in unemployment long after the economy stabilised.
In SA, the situation is dire. "The average South African has seven pieces of credit," says Sebastien Alexanderson, MD of National Debt Advisors. "In layman’s terms, this means the average South African has seven accounts to repay on a monthly basis." These may include, but are not limited to, store accounts, vehicle finance, bond repayments and credit cards.
As a nation, we are already grappling with issues such as poverty, over-indebtedness and unemployment. If the draft National Credit Amendment Bill is passed, SA will have to deal with the repercussions afterwards. "If the bill is passed, we can expect a domino effect on small business owners and lenders losing out on repayments due to them," says Alexanderson. "Inevitably, this could lead to young entrepreneurs going out of business altogether."
With the current economic climate, perhaps it would be better to encourage alternative debt solutions, such as debt counseling. While addressing the pressing issue of over-indebtedness in SA, debt counseling also gives consumers a sense of responsibility over their credit behaviour, which could prevent reckless spending in the future.
• Volkwyn is content writer for digital marketing company Click Me, a subsidiary of National Debt Advisors.