Frederick Mitchell, Chief Economist | Aluma Capital (Pty) Ltd

January 30, 2025

Private Sector Credit Extension (PSCE)

December 2024

In 2024, South Africa saw a 4.0% increase in credit extended by financial institutions, with December demand rising by 3.8%. While credit demand remains low, the 50-basis point interest rate cut should boost property and fixed asset purchases, enhancing disposable income and overall demand as we progress into 2025.

In 2024, credit extended by financial institutions in South Africa increased by 4.0% for the year, with demand for credit growing by 3.8% in December, following a 4.2% rise in November. Despite this growth across most sub-categories, overall credit demand remains low, even after the interest rate reduction in November.

Mortgage advances and credit for fixed asset purchases are sensitive to interest rates, and the 25-basis point cut in November has not yet significantly affected property demand. The overall interest rate reduction of 50 basis points for 2024 may take time to impact the market, with benefits likely to become apparent later in 2025 as disposable income for households and businesses improves.

In December, instalment credit sales rose by just 0.2%, following a 0.7% increase in November, with an annual increase of 6.1% for December 2024. Over the past two years, consumers have increasingly relied on short-term credit to navigate financial pressures and rising living costs, evidenced by a 4.5% increase in loans and advances in December after a 4.6% rise in November.

Growth in property and fixed asset purchases remains modest, with mortgage advances increasing by only 3.2% in December 2024. The slowdown in mortgage growth rates in late 2023 is largely due to the impact of rising interest rates on the property sector. However, the recent 50-basis point interest rate cut and the potential for another 25-basis point reduction in January 2025 may enhance demand for properties and fixed assets in the coming months. As lower interest rates improve disposable income for consumers, overall demand for goods and fixed assets could also rise as we move into 2025.

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Budget Speech 2025

A Balancing Act

Much has happened in the last twelve months as well as the last month since the postponement of the February 2025’s budget. The big talking point and “bone of contention” was the mooted 2% increase in VAT. This increase was met with fierce resistance and made “balancing the budget” quite difficult, as the government has to decide between increasing taxes of cutting expenditures, leaving the Government of National Unity (GNU) between a “rock and a hard place” as it currently stands. The increase in VAT or other taxes sprout from the various expenditure items the government announced or want to implement which among other things include the National Health Insurance (NHI), a transformation fund and continuation of the Covid-19 relief grant and the possible introduction of a Basic Income Grant (BIG).

A View on Company Profits

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A Sticky Affair

The South African Budget Speech Postponement

The Laffer Curve is an economic theory that describes the relationship between tax rates and tax revenue. Proposed by economist Arthur Laffer, the curve suggests that there is an optimal tax rate that maximizes government revenue without discouraging productivity, investment, and economic growth. The central idea is that increasing tax rates beyond a certain threshold can lead to diminishing returns; higher taxes may disincentivize work, entrepreneurship, and investment, ultimately reducing the overall tax base.

GDP, Economic Growth and Inflation

2024 Q4

The South African economy showed resilience with a 0.6% growth in the fourth quarter of 2024, despite challenges. Key sectors like Agriculture and Finance thrived, and improved consumer demand signals optimism for 2025. With continued market confidence and government reforms, there is potential for significant economic advancement ahead.