Latest interest rate hike will exacerbate debt levels, policy forum told

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As thousands of people across the country braved long queues to take advantage of Black Friday bargains last week, a UCT academic has cautioned that encouraging South Africans to spend blindly might not be the best way to get the economy back on a positive track.

"South Africans are highly indebted and the latest interest rate hike will only exacerbate debt levels," said Dr Co-Pierre Georg of the African Institute of Financial Markets and Risk Management (AIFMRM) at the University of Cape Town. "In this context, encouraging people to spend more might not be the best strategy."

Speaking at the 2nd Annual AIFMRM Policy Forum on Household Debt and the Macroeconomy, Dr Georg said that while the country does not necessarily need austerity measures, it does need to encourage judicious domestic consumption and get people to save - not spend - or at least to spend within their means.

"Spending per se is not bad, but it needs to be balanced against debt, particularly household debt, which is too high in South Africa," he said. According to the Reserve Bank of South Africa, household debt is currently taking up as much as 78% of South Africans' disposable income.

The poorest have most debt

The guest speaker at the event, Professor Atif Mian from Princeton University, said this is not an idle speculation. His research has shown a clear link between household debt and economic slowdowns and even recession. His latest book, House of Debt, which he co-authored with Amir Sufi, details how household debt - the fastest growing segment of the credit market in the past 40 years - contributed to the 2008 global recession.

His work illustrates that the poorest 20% of home owners in the US also had the largest amount of debt, while the wealthiest 20% had the least debt, but also the largest share of the stocks and bond market.

One way to help reduce the burden on the poor was to lower interest rates, suggested Professor Mian. At the other end of the scale, Dr Georg said that people should also be motivated to save more.

"The government need to incentivise savings more," said Dr Georg, pointing out that South African banks charge fees for depositing money, which is unusual compared to countries elsewhere. He said this did not encourage consumers to put their money in the bank and focus on saving.

While there is no silver bullet for fixing the economy, ignoring the role of household debt could lead financial authorities to make mistakes, Professor Main cautioned. "Properly incorporating household debt into macro models can have policy implications in terms of how we should regulate the market and how we should design the financial products in the first place," he said.

"While initiatives like Black Friday may push retailers into the black, it's not doing the country any good if all the shoppers are going into debt," agreed Dr Georg. "The last thing we want to be doing in South Africa now, is to increase household debt and up the likelihood of a national recession."