Consumer Financial Vulnerability Index QUARTER 3, 2017 RESULTS

Transcription

1 Consumer Financial Vulnerability Index QUARTER 3, 2017 RESULTS

2 The consumer space is truly tough The majority of South African consumers are finding it increasingly difficult to earn a sufficient income, buy food, pay the bills, save some money and repay debt. This is evident from Momentum/Unisa s Consumer Financial Vulnerability Index (CFVI) which shows that an already tough situation worsened even further in the third quarter of 2017 (Q3 2017). Following a sharp weakening to 48.4 points in Q from 52.3 points in Q1 2017, the CFVI deteriorated further to 47.0 points in Q What s more, all four subcomponents of the CFVI, namely income, expenditure, saving and debt servicing worsened for a second quarter in a row. This means that the majority of consumers are feeling financial pressures emanating from all over - and not from just one or two of the subcomponents. When the consumer space is tough, it normally manifests itself in a negative and vicious economic cycle. For instance, when consumers become more financially vulnerable, personal income tax receipts will be under pressure, which in turn will increase the fiscal deficit. This will put pressure on the rand exchange rate to depreciate, which will fuel consumer price inflation and further increase consumers financial vulnerability. The above situation is currently at play in South Africa. A higher tax burden on individuals (announced in the February 2017 budget) contributed to a sharp deterioration in the CFVI in Q This, in turn, pointed to lower personal income tax receipts, which indeed happened. The Medium Term Expenditure Policy Framework - commonly known as the mini-budget - announced last month by minister Malusi Gigaba, showed dramatic lower than estimated personal income tax receipts, which increased the fiscal deficit and contributed to a sharp weakening in the rand exchange rate against a number of currencies. Should the rand maintain these weaker levels, it should manifest itself in higher consumer price inflation and pressure on consumer finances. Pressure on consumer finances, however, also indicates that company profits will be under pressure. This means lower shareholder value and household wealth, less than expected company tax receipts for the government, an increasing probability of worker retrenchments and a higher unemployment rate. These consequences will, in turn, increase consumers financial vulnerability. To reduce consumer financial vulnerability will require innovative and well thought through solutions. Increasing taxes to reduce the fiscal deficit will contribute to more consumer financial vulnerability rather than reducing it. A better solution will be to cut government expenditure to affordable levels, given the current paltry state of the economy. And retrenching workers to improve profits will also not be a sustainable solution. The more sustainable solution for most companies would be to assist workers in order to alleviate financial stress and improve their productivity. 2 Consumer Financial Vulnerability Index Q Results

3 Table 1 provides an overview of the changes in the quarterly scores of the Consumer Financial Vulnerability Index (CFVI) and its sub-components during Q and the two preceding quarters. The measurement scale shows that consumers continued to perceive their finances to be very exposed owing to influential events during Q2 and Q3 2017, compared to mildly exposed in Q Table 1: Overview of CFVI and its sub-components (quarterly) CFVI components Q Q Direction Q Direction Income Expenditure Savings Debt servicing Overall CFVI Extremely vulnerable Very exposed Mildly exposed Extremely secure 3 Consumer Financial Vulnerability Index Q Results

4 Economic and political events that impacted consumers cash flow during Q This higher level of consumer financial vulnerability was expected given the sharp deterioration in Q and economic indicators showing that conditions are not improving. For example, the Bureau of Economic Research s Consumer Confidence Index has been in negative territory during the period August 2014 to July Economic growth rates between 2014 and 2017 declined to a low average of 1.7% to an expected growth rate of only 0.7% during These are a continuation of sustained tough conditions as signified by declining growth in gross national income per capita and, household consumption expenditure. Some political realities which strongly contributed to the negative economic environment and increasing level of consumer vulnerability include the following: These uncertainties negatively impacted business confidence and their propensity to invest and spur economic growth, employment and an improved consumer space. The Economist Intelligence Unit s (EIU) September 2017 South Africa Country Report reveals that economic growth is held back by declining confidence in the political environment. The EIU is of the opinion that business sentiment and private investment remain weak owing to South Africa s loss of an investment grade credit rating and increased political uncertainty. The EIU also estimates the following with respect to Q compared to Q2 2017: GDP only grew by 0.1%. Manufacturing output decreased by 1%. A negative and uncertain political climate, including unexpected and destabilising cabinet reshuffles. A perceived lack of action from government to address corruption, low economic growth, low business confidence and high unemployment. Looming credit rating downgrades due to the perception that government is not doing enough to address the concerns of ratings agencies. Many reports focusing on state capture with a perception that nothing is done to investigate the allegations. Employment stagnated during this period. Retail sales volumes decreased by 0.2%. The views expressed by various domestic and international institutions suggest that South Africa is still on downward political and economic trajectories which need to be addressed first before a serious turnaround could be contemplated. The implication of this is that heightened levels of consumer financial vulnerability are expected during the short-to medium-term. 4 Consumer Financial Vulnerability Index Q Results

5 A closer look at the CFVI Q Sub-indices Income vulnerability On the up side, moderating consumer price inflation (CPI) has provided some relief to consumers The income vulnerability measure of the CFVI declined from 49.0 points in Q to 48.8 in Q This is a continuation of the very exposed feelings that consumers experienced with respect to their incomes in Q The very exposed financial situation of consumers is reflected by the large proportion of negative responses by key informants contacted for the purposes of the Q CFVI survey: 62% disagreed that consumers chances of retaining or obtaining employment during Q improved (compared to 61% during Q2 2017). 68% felt that consumers income earning prospects did not improve over this period (compared to 67% during Q2 2017). 59% disagreed that consumers ability to acquire some income from friends or family improved over Q (compared to 57% during Q2 2017). Furthermore, high levels of unemployment and weak business activity led to greater uncertainty about employment opportunities and job security, which in turn contributed to greater income vulnerability. Expenditure vulnerability The expenditure vulnerability measure of the CFVI declined from 49.1 points in Q to 48.5 in Q This provides a clear indication of the high levels of vulnerability that consumers experience in their efforts to afford all their necessary expenditures. Key informants are reflecting this in the large proportion of negative responses in the following areas: 62% felt that consumers were not able to improve their ability to make their normal purchases during the third quarter of the year (compared to 61% during Q2 2017). 65% of respondents said that consumers were not able to stick to their expenditure budgets over this period (compared to 64% during Q2 2017). 68% of key informants disagreed that consumers expenditure hardly ever exceeded their income during the third quarter (compared to 69% during Q2 2017). 5 Consumer Financial Vulnerability Index Q Results

6 A closer look at the CFVI Q Sub-indices Furthermore, considering the weaker consumer confidence over this period, subdued consumption expenditure during Q was expected. However, on the up side moderating consumer price inflation (CPI) and the 25 basis point reduction in the repo rate provided some relief to consumers. Had this not happened, consumer financial vulnerability might have increased even further in Q Savings vulnerability The consumer savings vulnerability score declined sharply in Q to 46.3 from 48.8 in the previous quarter. This is the lowest score for savings vulnerability since Q Growing pressures on consumers wallets owing to, among other things, increasing personal income tax rates, declining employment, relatively high increases in prices of necessary goods and little-tomoderate growth in salaries and wages, contributed to consumers limited savings ability. This is reflected in the following key informant results: 72% disagreed that consumers ability to save improved during Q (compared to 65% during Q2 2017). 66% disagreed that consumers ability to save for old age improved in Q (compared to 65% during Q2 2017). 64% disagreed that consumers were able to improve their savings for hardships/emergencies during Q (compared to 68% during Q2 2017). Debt servicing vulnerability The perceived recovery in consumers debt servicing vulnerability in Q when a score of 51.2 was achieved was short-lived as this score declined to 46.6 points in Q and even further to 44.3 in Q This decline from Q to Q is reflected in the following key informant results related to consumers debt servicing capabilities: improve their ability to repay their outstanding debt during Q (compared to 69% during Q2 2017). 72% disagreed that consumers debt situation improved to such an extent over the period that they did not need to consider seeking assistance from someone else (compared to 74% during Q2 2017). 69% felt that consumers needed to consider reducing their other commitments in order to repay their debt during the second quarter (compared to 67% during Q2 2017). This suggests that while consumers may be tightening their belts with regards to spending, they are allocating fewer resources towards repaying outstanding debt. Why are consumers vulnerable? The CFVI survey required key informants to provide up to three reasons why they think consumers are financially vulnerable. The results show that 25% felt price increases or inflation contributed to consumer financial vulnerability during Q (meaning that their income is insufficient), while 22.7% stated unemployment as another contributor. Other main reasons provided include consumers having too much debt (given their lack of sufficient income, making the debt excessive) and an unaffordable cost of living. The perceptions from key informant respondents regarding the financial management capabilities of consumers as part of the Q CFVI survey illustrate the lack of financial literacy among consumers. This places additional strain on consumer finances, an issue that can be alleviated and mitigated. The results reveal that: 70% believe that consumers are not responsible in their use of credit. 68% believe that consumers do not plan their finances. 73% of key informants, despite the reduction in the repo rate, believed that consumers were not able to 65% believe that consumers are not living within their means. 6 Consumer Financial Vulnerability Index Q Results

7 A closer look at the CFVI Q Sub-indices 60% believe that consumers are generally financially illiterate. 60% believe that consumers do not demonstrate selfcontrol when it comes to spending. Behavioural impacts on consumer financial vulnerability showed that a 1% increase in having a written budget translates into a 4.2% increase in disposable income, 3.5% higher asset values and a 3.1% increase in financial wellness. More importantly, a 1% increase in financial planning translates into 17% higher incomes, 14.2% higher asset values and a 12.6% increase in financial wellness. Doing the right things can on its own therefore reduce consumer financial vulnerability and improve financial wellness, even in an increasingly tough political and economic environment. A correlation analysis of the behavioural drivers of consumers financial vulnerability outcomes was conducted. The results are summarised in table 2. The correlation coefficient (r) reflects the relationship between consumers financial vulnerability outcomes and a particular behavioural factor/driver. It is clear from table 2 that behavioural variables are strong predictors of consumer financial vulnerability as well as other financial behaviour outcomes. Assuming consumers possess sufficient income, the correlation coefficients suggest that the responsible use of credit can reduce financial vulnerability most. However for this to happen, consumers need to engage in activities such as financial planning and improving their financial literacy. This in turn improves their self-control when spending and taking on more debt, as well as their ability to adapt to changing financial conditions. Conclusion The results of the Q CFVI show that consumers state of financial vulnerability continues to deteriorate. The macroeconomic, microeconomic, political and other conversion factors that continue to impact their lives are not at all facilitative towards escaping financial vulnerability. Furthermore, based on the insights provided by domestic and international institutions, it seems highly likely that the consumer space will remain tough for longer than can be afforded. For this to change, decisive consumer centric actions are needed from politicians and business leaders. However, even if such political and economic actions don t materialise, not all is lost for consumers. Research has shown that consumers can through their own actions, reduce their financial vulnerability. The Momentum/Unisa Household Financial Wellness Index 7 Consumer Financial Vulnerability Index Q Results

8 A closer look at the CFVI Q Sub-indices Table 2: Inter-correlations between financial vulnerability and financial behaviour questions CFVI are financially literate conduct financial planning demonstrate self-control when spending demonstrate selfcontrol when taking on more debt can adapt to changing financial conditions are responsible in use of credit are good at expanding incomes CFVI are financially literate conduct financial planning demonstrate self-control when spending. demonstrate self-control when taking on more debt can adapt to changing financial conditions are responsible in use of credit are good at expanding incomes 0.268** ** 0.536** ** 0.360** 0.418** * 0.242* 0.341** 0.604** ** 0.332** 0.449** ** ** 0.331** 0.453** 0.506** 0.454** 0.376** * ** 0.359** 0.435** 0.329** 0.595** Note: Any coefficient above 0 indicates a positive relationship, a * indicates a statistically significant relationship at a 90% level of certainty and ** indicates a statistically significant relationship at a 99% level of certainty. 8 Consumer Financial Vulnerability Index Q Results

9 A closer look at the CFVI Q Sub-indices Table 3: Scores of the CFVI and its sub-indices This reflects the impact of political, economic, social & institutional volatilities & uncertainties experienced by consumers. Table 3 provides the long-term trend of the CFVI and its sub-indices. It is clear from this table that the CFVIscores on all the sub-indices were volatile during the 2013 to 2017 period, with vulnerabilities increasing during the period Q to Q This reflects the impact of political, economic, social, and institutional volatilities and uncertainties experienced by consumers. Moreover, these volatilities are exacerbated by the consumers lack of financial capability. Year Date Income Expenditure Savings Debt servicing Overall CFVI Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Consumer Financial Vulnerability Index Q Results

10 A closer look at the CFVI Q Sub-indices Figure 1: Measurement scale of consumer financial vulnerability index Financially Secure Extremely Secure Very Secure Cash flow position is under control with little threat of becoming financially vulnerable Financially Exposed Mildly Exposed Very Exposed Cash flow affected to such an extent that it creates a high risk of becoming financially vulnerable/insecure Financially Vulnerable Very Vulnerable 0-20 Extremely Vulnerable Cash flow affected to such an extent that it creates an actual experience or sense of being financially insecure and unable to cope ABOUT THE INDEX The results of this release of the CFVI stem from research conducted by Unisa on behalf of Momentum. The term Consumer Financial Vulnerability implies that consumers experience a sense of financial insecurity or an inability to cope financially. In essence, the CFVI identifies the specific financial sub-component(s) that consumers on average feel are causing stress to their cash flow positions. Therefore, it provides a window into the psyche of consumers and how vulnerable they are feeling with regards to their income, expenditure, savings, and debt servicing capabilities. Insights into consumers financial positions are vital to determine the extent to which economic growth and government programmes translate into improved financial stability of consumers. As a quarterly indicator, the CFVI fills an important information gap in South African data on consumer finances as viewed by consumers in the sense that it regularly provides updates as to the state of consumers financial vulnerability. The results of this release of the CFVI stem from research conducted by Unisa on behalf of Momentum. The results of this release of the CFVI are based on a selection of approximately 100 key informants from relevant industries (including credit industry institutions, retailers providing credit and municipalities) that are able to gauge consumers financial perceptions. 10 Consumer Financial Vulnerability Index Q Results

11 Compiled by Prof. Carel van Aardt, Bureau of Market Research, Unisa Mrs Jacolize Meiring, Department of Taxation, Unisa Mr Willem van Lienden, Bureau of Market Research, Unisa Prof. Bernadene de Clercq, Department of Taxation, Unisa Mr Johann van Tonder, Researcher: Financial Wellness, Momentum Sources Bureau for Economic Research. Consumer Confidence Index Q Bureau for Economic Research. Business Confidence Index Q Economist Intelligence Unit. Country Report South Africa September Investec. Economic Outlook Momentum/Unisa. Household Financial Wellness Index Nedbank. Forecasts Annual October Statistics South Africa. Retail trade sales August Tim du Plessis. Presentation at PSG Wealth on 18 October 2017.