Slowdown in SA credit and money supply

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By Kevin Lings

SA credit and money supply growth slowed noticeably in August – very encouraging from a monetary policy perspective. Credit growth is expected to slow substantially into 2009.

In August 2008, SA growth in broad money supply (M3) was recorded at a much more encouraging 15.4% y/y, down from 18.5% y/y in July and 20.3% y/y in June. The market was expecting growth to slow to 17.4% y/y. Overall, while M3 growth remains relatively high, there are very clear signs of a slowdown, which is expected to continue in the months ahead as the economy slows further.

The growth in private sector credit eased to 18.6% y/y in August, from 19.8% y/y in July. Markets were expecting a slowdown to 19.2% y/y. While private credit demand continues to grow at a relatively robust pace, the growth rate has slowed measurably over the past 12 months. In particular, mortgage credit is now growing at only 17.6% y/y, well down from a peak of 30.9% y/y in October 2006 (see chart attached). Similarly, credit-card growth has eased to an annual rate of only 6.7% y/y, which is negative in real terms. This compares with growth of well over 35% y/y throughout most of 2007 (see chart attached).

Encouragingly, from an interest rate perspective, consumer credit is subsiding, especially the granting of new credit facilities. Much of the existing growth in household debt is being driven by either by a draw-down of existing credit facilities or distress borrowing, or both.

In real terms (adjusting for inflation), the growth in private sector credit (excluding investments) has slowed noticeably, mostly due to the rise in inflation. Real credit is now growing at only 5.2% y/y, well down from the peak of 20.8% y/y in February 2007. During this period inflation has risen from 5.7% to 13.7%, a rise of 8 percentage points.

As discussed over the past few months, on a trend basis the annual growth in credit demand is showing very clear signs of slowing. There is evidence that the previous increases in interest rates, the introduction of the NCA, and slump in disposable income growth are all having a moderating impact on overall demand for credit, as well as on consumer and housing activity. This is expected to continue throughout the remainder of this year and well into 2009. In fact, I expect household credit to slow to well below 10% y/y in the early part of 2009. This is partly due to base effects, but also reflects the sluggish economy and the fact that much of the current growth in household credit is reflecting a draw-down of existing facilities rather than the granting of new credit.

Unfortunately, there is also growing evidence that consumer debt defaults are rising sharply. Most banks and retailers have reported a noticeably increase in bad debts in the past year. In addition, the attached chart on insolvencies shows a marked increase, albeit off a very low base. These trends are likely to intensify in the months ahead and become far more noticeable in 2009.












Source: Kevin Lings, Stanlib, September 30, 2008.


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