Stores brace for bad debt

Earlier this month, the Reserve Bank raised interest rates to a near five-year peak, driven by a deterioration in inflation expectations, while Eskom's proposed electricity tariff hikes have added to the worsening inflation outlook.

Standard Bank economist Jeremy Stevens says households owe about R737bn in mortgage advances, instalment and leasing sales and credit card balances — up from R210bn in 2001.

But households have R1,2-trillion in disposable income. He says households can afford this strain on their balance sheets this year, “which may prompt a further slowdown in household debt and consumption expenditure”.

While some households could be solid thanks to rising house and equity values, low- to middle income households will be in a precarious position if things get much worse, Stevens says.

“Should the tide turn especially sour, low- to middle-income households are likely to be squeezed as the full impact of the tightening in monetary policy takes effect,” he says.

Warwick Lucas, an analyst with Imara SP Reid, says consumer spending started slowing a while ago. However, he says there are more difficulties to come as consumers find themselves under more pressure, which is already showing up in slowing car sales and lower housing prices.

“I can't say that I can think of anyone who is going to benefit from this other than debt collectors,” he says.

Syd Vianello, an analyst with Nedcor Securities, says some retailers are not extending their books, but are managing the debt they already have, although this comes at the expense of sales.

Despite this, there is expected to be an uptick in bad debt, although Vianello does not expect a catastrophic effect. Bad debt is expected to be higher at midyear than at December, he says, but not massively so.

While Foschini has been accelerating its debt recovery processes and its book has hardly grown recently, Vianello says it is of concern that Truworths continues to grow its book.

Tessa Christelis, executive manager of investor relations at Edcon, says the company is not expecting a large increase in bad debt and has not changed its systems.

She says bad debts are linked more to the age of the account and job losses than interest rate increases, unless rate hikes lead to job losses.

Chris Gilmour, an analyst with Absa Asset Management Private Clients, expects bad debt to balloon, especially as more rate hikes could be in the pipeline.

He expects inflation to remain high for some time, and food and oil prices to pressure consumers' pockets.

Companies in the furniture retail sector, such as JD Group and Ellerines, are expected to see slowing sales as furniture is a discretionary item. JD Group is the most vulnerable of the furniture retailers as it is exposed to the indebted middle-class group.

Ellerines, recently purchased by African Bank, also expects its middle-income customers to feel pressure. However, Gilmour says this will be seen only to a limited effect in African Bank's numbers.

Fashion and food retailer Woolworths, which is trading under a cautionary, has already felt the effect of bad debts.

Woolworths says though it has grown its debtors book in the second quarter to December, growth has slowed “significantly” and the “tougher collections environment” means bad debt, including collection costs, have increased to 7,8% from 4,1% of the gross debtors book. In addition, interest rate hikes, rising inflation and the National Credit Act have caused a slowdown in consumer spending, the retailer says.

Woolworths says it expects customers to be more careful about how they spend their money. It will monitor the effects of rate hikes on customers, it says.

Sivi Pillay, head of risk and compliance at Woolworths Financial Services, says if customers experience difficulty in paying accounts, they should approach the retailer to make arrangements.

Figures due today will show whether growth in retail sales contracted in February compared with the same month last year. Sales rose by 0,2% in January after declining for two months in a row in November and December.

Source: Business Day

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