Consumers should still spend with caution

Friday, May 29, 2009

Despite the further cut in the repo rate which will bring reprieve to cash-strapped South Africans, consumers should still be wary about spending beyond their budgets and buying on credit, writes Neo Semono.

Statistics South Africa this week announced that the Gross Domestic Product (GDP) for the first quarter showed an annualised 6.4 percent contraction. This is the second contraction in a row meaning that the economy is now in a recession.

This is the first time the country has been in a recession in 17 years.

On Thursday, the Reserve Bank Governor Tito Mboweni announced a 100 basis point cut in the interest rate following a two-day Monetary Policy Committee meeting. The cut is the fourth in a row. The repo rated now stands at 7.5 percent.

Although Mr Mboweni has offered some relief, he also warned that consumers should not expect any further significant cuts "given the stickiness of inflation.

"The mood is not right for further significant cuts. We've probably done as much as we can," he said.

The National Credit Regulator (NCR), which is responsible for the regulation of the country's credit industry, said consumers should review their budgets on a regular basis as well as insurance policies once in a while.

The regulator also urges consumers not to cancel important insurance policies like car and households. "Rather shop around for cheaper premiums," it said.

The regulator said should people be subjected to retrenchments they should first inform their creditors of this and then use their retrenchment packages to settle their debts.

South Africa's unemployment rate for the first quarter of 2009 increased from 21.9 percent in the last quarter of 2008 to 23.5 percent indicating job losses.

The NCR also reminded consumers that they have a right to surrender goods that they no longer can afford. This means that they can return goods to the credit provider under an installment agreement.

Homeowners have also been encouraged not to sell their property. "Now is not the time to try and sell unless you are really not coping. If you do not have your own property or are battling to retain your existing one, renting might be a better option," said the NCR.

It further advised consumers to pay off their debts with the highest interest rates first and the rest in a descending order.

Consumers can also dramatically reduce their spending by cutting out alcohol, gambling, tobacco and entertainment. This will also make more money available to pay off debt.

NCR Senior manager for education and strategy Peter Setou said the regulator continuously conducted workshops nationally to inform stakeholders about the National Credit Act and the regulator.

"During the workshops, we also provide tips to survive the current economic conditions," he told BuaNews.

In March the NCR had a joint campaign with the Consumer Protection Forum (CPF) that comprises of the regulator, the Department of Trade and Industry, the nine Provincial Consumer Affairs Directorates, the Financial Services Board (FSB), the Council for Medical Aid Schemes, Independent Communications Authority of South Africa (ICASA) and other regulators.

The campaign, he said, aimed to provide consumers with tips as well as educate them on their rights and obligations.

One of these obligations is that should a consumer be handed over to debt collectors, they make contact with the collector and arrange to pay interest and other costs added to accounts handed to debt collectors.

However, it is not all gloom for hard-pressed South Africans as the negative downturn is expected to improve in the second half of the year.

"We expect another quarterly contraction for the second quarter, but this is expected to be smaller. However, the economy is expected to improve in the final two quarters of this year," said Director General in the Treasury Lesetja Kganyago.

The Industrial Development Corporation of South Africa, which provides start-up capital to entrepreneurs and businesses, said it had not reduced the amount of capital it planned to invest.

IDC Divisional Executive for Marketing and Corporate Affairs Neo Sowazi said the IDC would continue to support businesses despite the economic conditions.

"Despite IDC's balance sheet and income coming under pressure as a result of the economic crisis, the IDC has not reduced the amount of capital that it plans to invest. Over the next five years, the IDC is budgeting to approve funding of R70 billion,"

This has increased from about R60 billion a year ago, she told BuaNews.

"The IDC, as a development finance institution, is continuing to support businesses despite the economic conditions and is not changing the conditions under which it will provide credit.

"The IDC will also provide funding for businesses that are experiencing difficulties as a result of the economic crisis, but will not provide blanket bailouts," she said.

Ms Sowazi said as a result of the crisis there had been a dramatic increase in the number of enquiries for funding because commercial banks were providing less credit.

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