PROF Bernadene de Clercq is head of personal finance research at Unisa, Johann van Tonder is also at the Unisa Bureau for Economic Research’s personal finance research unit.

SUMMIT TV: According to the Unisa Bureau of Market Research, their consumer vulnerability index rose from 47.9 points in the third quarter of last year to 50.1 points in the fourth quarter. It seems consumers are still taking strain. How is this research conducted?

BERNADENE DE CLERCQ: We conduct the research in conjunction with MBD Credit Solutions — they are our partners in this research. There are four quarterly surveys; two are consumer-based, where we do household surveys speaking to consumers directly. In the other two quarters we consult with key informants in the financial services industry, including credit providers, retailers and municipal account managers. They have insights into the financial position of consumers. From that we construct consumers’ financial positions and from that we construct consumer cash flow positions and how they perceive their feelings about being financially secure or vulnerable and whether they are concerned.

STV: There was a slight improvement in the index — how should we actually read this number and what does this say about the state of the consumer?

BDC: I think it’s important to understand that this index tells us about the feelings of consumers — it’s a reflection of their perceptions about surviving the quarter, it’s not hard data like over-indebtedness and those types of figures. This tells us in this last quarter consumers felt a little more relieved about their financial position but they were still in the financially exposed category that we have — so they were far from out of the woods but they felt less concerned than in the previous quarter which was the third quarter of 2012.

STV: What was the biggest driver for this improvement?

BDC: From the analysis that we conducted there was less strain in servicing their debts in conjunction with the interest rate drop that we had in the third quarter that gave consumers a bit of breathing space and they felt they were able to survive, manage their debt and meet the commitments they had and some of them even save a little. Overall I think servicing their debt was the biggest reason for the improvement.

STV: Talking about debt servicing — can you explain how that relates to this consumer index?

JOHANN VAN TONDER: The main reason consumers felt less vulnerable in terms of debt servicing, as has been said, was the reduction in the Reserve Bank repo rate — debt servicing is one of four components in the index, where we measure their feelings in terms of income, expenditure, savings as well as debt servicing. We try incorporate the whole income statement and balance sheet of the consumer when we measure the consumer’s financial vulnerability. If we look at the numbers, basically in terms of savings consumers did better but they remained in the very exposed category, even though they did better. Where we had a category change was in terms of debt servicing, where they moved from a very exposed position to a mildly exposed position — therefore they had a little more money left after the interest rate reduction in terms of their cash flow so they had better choices compared with the third quarter. That’s the main reason they felt a little bit less vulnerable — but still in a mildly exposed category.

STV: What I find quite interesting in this research is that you point to consumers being likely to default on noncredit accounts so it seems consumers are aware and quite vigilant about what’s important — but why are we still finding there is this struggle with servicing debt?

BDC: I think it goes back to what they can afford — given that their income streams are under pressure, they’ve had to access more debt to supplement incomes, and with rising costs such as fuel, transport and electricity they’ve run out of money and had to incur debt. We can also see the amount of debt increased against the drop in the interest rate, so the amount of debt increased and that is pressure that has remained for them. It also goes back to what you said, where they will default on the items that are not as sensitive — they don’t want to lose their house or their car, and would incur unsecured debt to supplement their secured debt to make that payment of the mortgage so they would default elsewhere but still pay the mortgage. They are using “financial savvy” in a way to protect assets but in the long term this is not something that is sustainable.

STV: I was going to ask just how sustainable this is. If you’re depending on interest rates remaining low, what happens when we see hikes? What’s going to happen to these consumers?

BDC: We did a lot of analysis on exactly that — I think the biggest concern for us is a the shift in the debt book, where unsecured debt has now replaced some of the mortgage debt at a much higher rate so if the interest rate increases there will be a big impact. In terms of the National Credit Act the formula for calculating interest rates is different so unsecured interest rates will have a detrimental impact on a lot of consumers.

STV: In quarter one of 2012 the index came in at 58.9 points and then it tumbled to 48.6 in quarter two. It’s improved again in quarter one this year so are these numbers seasonal? Does it depend on the time of the year — what influences are there?

JVT: Definitely. The seasons do have an impact on all four categories in the index — but it’s not just that but also what’s happening in the economy worldwide. If you remember what happened in the first quarter of last year, and in the second quarter it was Greek debt and that uncertainty. The interest rate reduction was a major issue in terms of debt. In the fourth quarter you won’t pick up a lot of growth in credit because it’s a seasonal thing and that’s more in the third quarter. What’s happened now is that consumers are trying to repay more debt, but if you analyse the numbers they’re still taking on more debt than they are repaying. The consequence of that is the total outstanding amount of debt is still continuing to increase, and that is a little concerning because what you need to do with lower interest rates is start repaying your debt faster. The gap between incurring new debt and repaying debt is growing so that is a concerning factor, especially when interest rates increase. That might not happen now but it will happen again so consumers need to start repaying their debt faster than what is currently the case.