Mining and Manufacturing sectors see the bggest improvements
Business debt conditions are improving, but only marginally and at a very slow rate
The Experian Business Debt Index (BDI) improved marginally in the first quarter of 2015 compared with the last quarter of 2014. This has been led by significant improvement in the mining and manufacturing sectors.
Despite the overall picture, the rate at which business debt conditions had been improving in the last two years has slowed significantly in line with worsening economic conditions, both domestically and abroad.
“It would seem that businesses continue to adopt a conservative approach, refraining from undertaking any more capital investment than is necessary to keep their businesses operating efficiently. The BDI trend does not point to any imminent major deterioration in overall business debt conditions, but rather one of lacklustre growth,” says Michelle Beetar, Managing Director of Experian SA.
“Interestingly, Experian’s recently launched sector indices revealed that only two of the nine main sectors of the economy witnessed an improvement in business debt conditions in Q1 2015. However, the improvement was so dramatic that it managed to outweigh the deterioration in the other seven sectors.”
The BDI readings, which have moved from 0.20 in Q4 2014 to 0.23 in Q1 2015, have remained above the 0.0 level which distinguishes between improving and deteriorating business debt conditions. However, both readings were lower than at any stage in the past two years which indicates that the rate of improvement in business debt conditions has reduced significantly.
The recovery was led by the mining and manufacturing sectors in Q4 2014 and Q1 2015. It followed the ending of the industrial relations turmoil in 2014 and resulted in significant improvement in the debt stress metrics of these sectors.
Several macro-economic forces had a negative impact on the BDI in Q1 2015. It appears that a general loss of business confidence in the wake of the mining and manufacturing sector strikes began to impact the rest of the economy later in 2014 and into the first part of 2015. The loss of business confidence was also exacerbated by the nationwide electricity outages introduced in December 2014.
Two contributing factors included the decline in the Producer Price Index (PPI) inflation rate to well below the Consumer Price Index (CPI) inflation rate as well as the progressive decline in long-term interest rates relative to short-term interest rates.
This is the first time the PPI has declined below the CPI since the global financial recession six years ago, making it increasingly difficult for businesses to pass on cost increases to consumers.
The decline in long term interests rates relative to short term interest rates have also put additional strain on pricing within the business sector due to an inability on the part of businesses to price more aggressively. The rising trend of short-term interest rates over the past year has also increased the debt servicing costs for businesses in the immediate future.
Just as there was a substantial divergence in the underlying trends in business debt conditions between some sectors, there were also countervailing trends in the debtors’ days’ profiles of companies.
“The ratio between outstanding debts of more than 60 days relative to those of less than 30 days diminished slightly, to its lowest level in the past decade, whilst the ratio of outstanding debts of more than 90 days relative to debts outstanding of less than 60 days, increased. While general business conditions remain relatively stable and businesses have enough cash to pay off their debts promptly, there is an increased incidence of some businesses experiencing significant trauma. This is as a result of the weaker overall state of economic activity and is likely in particular with small businesses,” says Beetar.
More generally, the average age of all business debts increased ever so slightly from 49.4 days in Q4 2014 to 49.8 days in Q1 2015. This indicates that businesses appear to be continuing to discount a soft growth environment and accordingly are managing their finances relatively soundly to survive in such conditions.