January 17, 2018

Business Debt Stress at its Worst since 2009 Global Financial Crisis

The latest Experian Business Debt Index (BDI) has revealed a significant decline to a level of 0.082 in the final quarter of 2015, from 0.263 in the third quarter and following a recent peak of 0.6 in the first quarter of 2014.

“The BDI is now registering its weakest level since the domestic economic recovery got underway in 2010, following the global financial crisis of 2008/09,” says Michelle Beetar, Managing Director Experian South Africa. “Continuing to remain just above the zero line, the BDI suggests however, that overall business debt conditions are not yet dire and that we are not witnessing a major collapse in economic activity at this point in time.”

A number of combined factors have caused a reduction in the rate of improvement in business debt conditions in the fourth quarter.

Most importantly, strains arising from declining economic growth both globally and domestically through 2014 and 2015 were evident. Domestic economic growth slowed, with the year-on-year growth in GDP estimated to have declined to 0.6% in Q4 2015, from levels of over 2% during 2014.

One of the main reasons for the slowdown in the South African economy was the slump in international commodity prices, driven in part by lower global economic growth and in particular, by a fairly significant slowdown in the Chinese economy.

The combination of the above factors had a knock-on effect that caused growth in exports to weaken, which in turn led to the depreciation in the Rand’s exchange rate, in particular against the developed economy currencies, during 2015.

This in turn created inflationary pressures, forcing the Reserve Bank to increase interest rates twice during the year, though by a relatively modest 25 basis points each time.

The resultant decrease in the growth of disposable income and increase in debt servicing costs weighed down on the debt servicing ability of the domestic business community. This is reflected by the average number of debtors’ days’ outstanding picking up in the last quarter of 2015.

Debtors’ Days
The rise in the average number of debtors’ days in the last quarter of 2015 may not at first glance appear particularly dramatic.

When compared to 48.8 days in the third quarter, the fourth quarter figure of 50.2 average outstanding debtors’ days was in fact marginally lower than the 50.3 days corresponding figure for the second quarter of 2015. It was also lower than the 51.5 outstanding debtors’ days recorded in the immediate aftermath of the platinum mining and metal industries strikes in the third quarter of 2014.

“However, the relative deterioration in financial health of businesses becomes apparent if one examines the ratio of outstanding debts of more than 90 days relative to the corresponding outstanding debts of less than 60 days,” says Beetar.

This ratio increased to 11.9 from 11.1 in the third quarter – significantly higher than the 6.6 low point for this ratio in the last quarter of 2013.

The fact that the number of outstanding debtors’ days is gradually increasing, albeit by what appear to be marginal amounts, is concerning as they are at the same levels observed before the 2008/2009 global financial crisis.

Small medium-sized enterprises (SME’S)

The debt age ratio for small businesses recorded a value of 14.94 in Q4 compared to the 11.9 for the total ratio. Average debtors days of 54 were recorded for small business compared to the 50.2 days for the total BDI Q4 reading. These results indicate that while the overall debt situation of businesses may not be deteriorating unduly aggressively, there are a group of companies that is indeed beginning to take a lot of financial strain and SME’S are dominant in this category.

All sectors feeling the pinch
The deterioration in business debt conditions in the fourth quarter was broadly distributed across most sectors of the economy, with one exception; manufacturing. This is because the marginal improvement in the manufacturing sector came off a low base, where, a year earlier, the metal industries strike had a major impact.

The BDI’s of six of the nine major sectors of the South African economy continue to track below the zero line. Additionally, the full effects of the drought conditions have not yet been felt, particularly considering that these intensified during November and December, laying the ground for what could be a period of double-digit food inflation, with potential knock-on effects across a number of sectors.

“There has undoubtedly been a relative weakening in business debt conditions. And with inflation and interest rates set to rise in coming months, there is bound to be further noticeable deterioration in the financial health of the business sector through 2016,” concludes Beetar

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