28 Nov 2017

PSCE update: Private credit extension moderates in October on account of slower corporate credit growth

Annabel Bishop

Chief Economic

Private sector credit extension moderated to 5.4% y/y in October from 5.5% y/y in September.

Figure 1: Household and corporate credit growth
  • Private sector credit extension moderated to 5.4% y/y in October from 5.5% y/y in September, mainly on account of lower rates of credit extended to corporates.
  • The weak economic growth backdrop along with persistently depressed business confidence and declining investment rates have contributed to the dampened corporate demand for credit. Specifically, corporate credit growth eased to 7.1% y/y in October from 7.3% y/y in September. By comparison, corporate credit increased at rates of 15.9% y/y in 2015 and 9.1% y/y in 2016.
  • Within the main corporate credit categories, growth in general loans and advances, which comprise nearly half of corporate credit, slowed to 8.4% y/y from double digit rates in H1.17. Growth in mortgage advances, which comprise 22% of corporate credit, decelerated to 6.7% y/y in October from rates above 10% y/y in the prior year.
  • Household credit growth lifted modestly to 3.5% y/y in October from 3.3% y/y in the prior month. The lift was underpinned by mortgage advances which constitute 60% of household debt and rose to 3.3% y/y from 3.0% y/y previously. However, growth in mortgage advances has been entrenched in the lower single digits throughout the post 2008/09 recession period.
  • Unsecured credit, which is the other sizeable component at 23%, increased at a rate of 3.1% y/y in October compared to 3.5% y/y in September. Growth in this category is well below rates of 20 – 30% last seen between 2011 and 2013.
  • Depressed consumer confidence, elevated unemployment rates, slower income growth, high levels of indebtedness and a higher tax burden have constrained consumers’ willingness and ability to spend. This coupled with the relatively tight credit standards applied by retail banks has manifested in the subdued rates of credit extension (see figures 4 and 5).
  • Moreover, according to the SARB Financial Stability Review “the average spread between the average interest rates paid by households and the prime rate has increased, contributing to the financial pressure on households” (see figure 3).
  • The heightened probability of a sub-investment grade credit rating by all three key credit rating agencies exacerbates the risk of sustained rand weakness and raises the prospect of interest rate increases which will likely impact the demand for credit going forward.
Figure 2: Growth in the components of PSCE
Figure 3: Spread between average household interest rates and prime rates
Figure 4: Household debt and debt servicing to disposable income ratios
Figure 5: Credit standards for approving loans