IT IS common cause that excessive debt contributed to the financial crisis that started in the developed world five years ago and helped to bring on the Great Recession.
However, the consensus up to now has been that South Africa managed to avoid the debt trap through a combination of conservative fiscal policy and proactive legislation.
Certainly, the country’s sovereign debt, at about 40% of gross domestic product, remains relatively low by global standards.
Nor is the average level of individual debt considered to be in the technical danger zone.
Nevertheless, the debt issue is becoming a major problem for South Africa, especially now that the US and Europe appear to have turned the corner economically.
Interest rates are rising, the rand is steadily weakening and foreign currency inflows are slowing just as the demand for capital is picking up in South Africa, on an ambitious state-led infrastructure development programme. Funding that programme was always going to be a difficult task, but with the economy stagnating, tax revenues thinning out and the cost of borrowing on the capital markets ticking up, questions are beginning to be asked about whether budget deficit targets can be achieved, how much more debt the state may have to take on, and how easy that debt will be to service in future.
As far as individuals are concerned, while average personal debt levels remain under control and unsecured loans make up a relatively small percentage of banks’ loan books and therefore do not present a systemic risk, social and political factors are at play that could complicate matters. Average debt figures can obscure the true picture, especially in a society as unequal as South Africa’s and with a level of unemployment as high as ours.
In addition, it emerged in the wake of the Marikana massacre that there is a large informal lending sector whose activities do not necessarily get taken into account in the official statistics. Many of the mineworkers involved in the unprotected strike on the Lonmin mine were highly indebted to loan sharks and saw only a fraction of their salaries each month due to excessive debt servicing costs.
Now, with an election a matter of months away and feelings still running high in poor communities such as Marikana, the government has woken from its slumber and rumbled into action. Two of the main personal debt-related initiatives that are now on the table include a proposed credit amnesty, which would see many blacklisted borrowers’ records scrubbed clean, and a review of the garnishee system, in terms of which creditors can use the judicial system to force employers to deduct money from indebted employees’ salaries.
It has become abundantly clear that the latter reform is an urgent necessity, although the devil lies in the detail. The former, on the other hand, smacks of political expediency. Both have the potential to have unintended consequences.
The proposed credit amnesty, which is being pushed especially hard by the National Council of Provinces, would benefit about 1.6-million people whose credit ratings have been sullied after defaulting on loans of R10,000 or less. While there is merit to the argument that those who eventually pay off their debts should not be prejudiced in perpetuity, the blanket amnesty that is on the table would almost certainly harm the very people it is supposedly intended to help. That is because with less information available to calculate risk, lending institutions would have either to hike loan costs or refuse more loans.
Past experience of such amnesties has also shown that beneficiaries do not necessarily become any wiser in the way they manage their personal finances; on the contrary, many people are encouraged to borrow more even if they know they will not be able to keep up with the repayments.
Proposed reform of the garnishee system makes far more sense than creating perverse incentives for people to borrow more.
Research by law firm Edward Nathan Sonnenbergs, with the support of companies that administer garnishee orders on behalf of employers, has revealed a dysfunctional system that is riddled with abuse and blatant fraud. Of the sample of employees who were included in the study, as many as half of the garnishee orders against them were invalid or obtained illegally, and a large proportion of the deductions were being made against loans that had already been paid off or had never existed.
The Gauteng finance department recently revealed that government employees in the province have, on average, six garnishee orders against their monthly salaries. According to the National Debt Mediation Association, a body that helps indebted consumers get their finances in order, there are as many as 3-million such active garnishee orders in South Africa at present.
So bad is the garnishee system that the Treasury is believed to be considering scrapping it altogether. However, this would amount to throwing the baby out with the bathwater and have similar negative consequences to a blanket amnesty for blacklisted debtors. Lenders need to have legal means at their disposal to force those who are able to repay loans but do not, to honour their contractual obligations.
A garnishee system that is properly regulated serves an important function, in the absence of which many lenders would have to simply close their doors.
The main problems with the garnishee system arise from a combination of corruption and poor regulation, specifically court officials being bribed, clerks of the court being allowed to issue the orders instead of magistrates, courts outside employers’ jurisdiction being used to issue orders, and a failure to include end-dates in orders.
The Banking Association of South Africa and the Treasury have formed a task team with a view to cleaning up the garnishee system and ensuring such orders become the instruments of last resort they were originally intended to be. While this is more easily said than done it is imperative that every effort be made to get the unsecured lending and debt recovery system to work.