Private sector credit demand eases amid third wave uncertainties

Private sector credit demand eases amid third wave uncertainties

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PRIVATE sector loans continued to remain in contractionary territory for the third month in May as corporates and households reduced taking credit on Covid-19-induced activity.

Data from the South African Reserve Bank (SARB) yesterday showed that private sector credit fell 0.42 percent year-on-year in May, following a deep decline of 1.76 percent in April.

This decline was better than market expectations of 0.9 percent.

SARB said the ease was primarily due to corporate credit, which contracted 5 percent year-on-year in May following a sharp 6.7 percent slump in April. South African businesses have remained reluctant to take on more credit as uncertainties over the economic outlook remain due to rising Covid-19 cases and lockdown restrictions.

In contrast, household credit extension continued an upward trend, growing by a robust 5.6 percent yearon-year from 4.7 percent in the previous month.

FNB senior economist Siphamandla Mkhwanazi said private sector credit extension declined on base effects while households accumulated assets.

Mkhwanazi said the influence of base effects waning would be evident in the coming months, which should see corporate credit extension ameliorating.

He said corporates might still be cautious with debt accumulation amid the prevailing Covid-19 third wave.

“The slight improvement in consumption credit uptake is encouraging and should be mildly supportive of household spending,” Mkhwanazi said.

“Nevertheless, souring consumer sentiment and the slow readjustments in the labour market could keep a lid on consumption expenditure.”

The divergent trends reflected base effects and how the two sectors approached credit uptake in May as the country was in the beginning of the third wave of Covid-19.

Corporates drew down on their credit facilities last year to boost their cashflow during the stringent lockdown in anticipation of the pandemic-induced economic fallout.

At the same time, household credit growth slowed as consumers became more wary of taking up more debt due to heightened uncertainty and job insecurity.

The influence of base effects on headline numbers, however, are expected to fade in the coming months.

Nedbank senior economist Nicky Waimer said credit numbers were expected to improve off a low base in the second half of the year.

“Household credit demand will continue to be the main driver, supported by gains in disposable income, low interest rates and attractive prices,” Waimer said.

“However, the upside will be partly limited by rising Covid-19 infections and an unfavourable jobs market, which will weigh on consumer confidence.”

Meanwhile, expansion in the broadly defined M3 measure of money supply decelerated for the sixth consecutive month to an 11-year low of 1.82 percent in May from a 2.02 percent gain in April.

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