SA economists challenge credit bubble theory


Research released today, 9 October 2013, has challenged the notion there is a bubble in unsecured lending in South Africa, while showing that credit still fulfils an important role in the economy.

The research was commissioned by, South Africa’s first online, short-term lender and conducted by economists Dr Roelof Botha, of the Gordon Institute of Business Science (GIBS), University of Pretoria and Dr Ilse Botha of the University of Johannesburg.

Dr Roelof Botha says, “Our study indicates there is no credit bubble.”

“It illustrates just how essential credit has been, and continues to be for economic growth. Post-recession, if unsecured lending had grown at the same rate as GDP, the economy would have been R219 billion smaller in mid – 2013.

“Also, if it had grown at the same rate as total private sector credit, the economy would have been smaller in mid-2013 by R395 billion, and we would still have been in recession. Right now, however, there is simply not enough growth for a credit bubble to exist.”

“Not only does credit raise living standards, but unsecured lending is usually the only viable source of working capital for SMMEs.

“We know how important small businesses are to our economic growth, so ensuring the availability of unsecured lending is going to be vital as we look forward to sources for future growth.”

Kevin Hurwitz, CEO of SA, says, “A lively debate has developed in South Africa over the relatively high growth rates for unsecured lending, so we decided to commission quantitative research to help clarify the issue.

“The research confirms our belief that the real debate in South Africa should be about ensuring credit providers are responsible, transparent, and legally compliant. But we think the obligation goes further than this. Compliance isn’t enough. Lenders should be ethical too. The fact that the research shows that there is no credit bubble, doesn’t mean that we should become complacent about our responsibility towards our consumers,” concludes Hurwitz.

Summary of the research

1. Composition of household consumption

The range of goods and services that households spend their disposable income on is dominated by food, clothing and transport (especially public transport). Households also spend money on education, health and communication, so it stands to reason that credit facilities allow many households to engage in economic consumption activity at an earlier stage in their income and expenditure cycle. Poor access to credit could translate into lower standards of living.

2. Utilisation of working capital

Some elements of unsecured lending are used for working capital, especially for small, medium and micro enterprises (SMMEs). National accounts data does not accurately capture the ratio between capital formation and total output for the latter sector but, for the economy as a whole, it averaged almost 19% between 2005 and 2012. A strong positive correlation exists between capital formation; economic output and employment creation in any economy.

3. Background analysis of household debt trends

A number of pertinent conclusions were drawn from an overview of trends in indicators closely linked to unsecured lending:

· The ratio between household debt and disposable income has declined consistently since 2008, from 82.4% to 75.7% (a decline of 8.1%). Sustained growth in real retail sales is therefore mainly due to increased formal sector employment and higher real salary levels. Low interest rates saw a sharp reduction in the debt service costs of households (in absolute and relative terms)

· A relatively low household debt/GDP ratio, compared to key trading partners with high competitiveness rankings for financial sector stability & efficiency

· Over the past decade, of the three components of gross domestic expenditure in the economy, household consumption has grown at the slowest pace

· Credit growth figures featured in many reports on household debt levels have seldom been expressed in average annual real terms and, as a result, are often exaggerated. Since bottoming out in April 2010, the inflation-adjusted average annual growth rate for the credit aggregate that encompasses unsecured lending amounts to 9.8%

· In sharp contrast, the comparable growth rate for mortgage advances has been negative over this period and overall private sector credit growth remains muted when compared to previous economic growth cycles

· A structural shift has occurred in the credit industry, whereby a saturated and stagnant residential housing market has led to a decline in the real value of outstanding mortgage loans, contrasted by relatively high growth rates for bank overdrafts and small loans

4. Relationship between unsecured lending and GDP

An econometric model was designed to determine the impact of unsecured lending and the key secured lending variable (mortgage loans) on GDP.

The main conclusions drawn from the econometric models are:

A strong positive correlation exists between unsecured lending and GDP

· Under a post-recession scenario of unsecured lending having grown at the same rate as GDP, the economy would have been smaller in mid-2013 by R219 billion (in nominal terms)

· Under a post-recession scenario of unsecured lending having grown at the same rate as total private sector credit, the economy would have been smaller in mid-2013 by R395 billion – and would still have been in recession.


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