SA credit growth remains high

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By Kevin Lings

In June 2008, SA growth in broad money supply (M3) was recorded at 20.28% y/y, down fractionally from 20.9% y/y in May. The market was expecting growth of 20.14% y/y. In June, claims on the private sector rose by a substantial R38.2bn. Overall, M3 growth remains high, although there is some evidence to suggest a slowdown in the months ahead.

The growth in private sector credit disappointingly rose to 20.3% y/y in June, up from 19.7% y/y in May. Markets were expecting a modest slowdown to 19.0% y/y. Mortgage credit growth was recorded at 19.9% y/y in June, down from 20.6% y/y in May and over 30% y/y at the start of 2007. Credit-card debt is slowing more noticeably, and is now down at 11.2% y/y from over 40% y/y in the middle of 2007. (Household credit growth slowed to 21.0% y/y in June from 21.7% y/y in May). In contrast, ‘other loans and advances’ – mostly corporate credit – accelerated to 26.2% y/y from 24.9% y/y in May.

While it is clear the credit demand is slowing, the slowdown is still relatively modest given how fragile consumer activity has been recently. In part, this could be due to continued distress credit. It could also be due to the impact of higher inflation. In other words, while credit growth is slowing only fractionally in nominal terms it is in fact slowing far more noticeably in real terms (adjusting for inflation, see chart attached). It is also clear that new applications for credit have slowed substantially and that much of the growth in credit is coming from existing facilities that have been in place for some time.

In real terms (adjusting for inflation), the growth in private sector credit (excluding investments) is now at around only 8% y/y, well down from the recent peak of 20.8% y/y in February 2007. During that time inflation rose from 5.7% to 11.7%, a rise of 6 percentage points.

On a trend basis, the annual growth in credit demand is clearly showing signs of slowing, albeit very slowly. There is evidence that the previous increases in interest rates, the introduction of the NCA, and slowdown in disposable income growth are having a moderating impact on overall demand for credit as well as consumer and housing activity. This is expected to continue well into 2009.

Unfortunately, from an interest rate perspective, I suspect the Reserve Bank would ideally want to see a much more convincing slowdown in credit demand in order to be comfortable with leaving rates unchanged in August. At this stage we would still expect interest rates to remain on hold in August, but once again there is likely to be much debate at the MPC meeting.

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Source: Kevin Lings, Stanlib, July 29, 2008.

 

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