Liquidation statistics reflect tough operating conditions

28 August 2008 Credit Guarantee Insurance Corporation of Africa Limited

Comment from :
Luke Doig (pictured), Senior Economist at Credit Guarantee Insurance Corporation

The first half of 2008 has seen a 10.2% increase (to 1432) in official liquidations of companies and CCs, with June 2008’s figure indicating a year-on-year rise of 28.7%.

However the 2007 figures were distorted by the civil service strike, with catch-up evident in the September 2007 total of 507, which was 113% higher than in September 2006. The 272 recorded in July 2007 was marginally above the 262 of a year earlier. Insolvencies of individuals and partnerships in the first five months of 2008 were 30.1% higher than the corresponding period in 2007.

  2005 2006 2007 Jan-June '07 Jan-June '08
No. of defaults against private persons 838,739 780,760 704,691 348,502 305,326
% change   -6.90% -9.70%   -12.40%
No. of defaults against businesses 52,412 62,344 43,044 22,086 26,369
% change   18.90% -31.00%   19.40%
Value of defaults against private persons (R,000) 5,691,019 5,424,858 5,241,959 2,645,676 2,411,112
% change   -4.70% -3.40%   -8.90%
Value of defaults against businesses (R,000) 959,838 1,158,388 896,532 428,802 512,229
% change   20.70% -22.60%   19.50%
Liquidations - companies & CCs 3,225 3,026 3,151 1,299 1,432
% change   -6.20% 4.10%   10.20%
Insolvencies - individuals & partnerships 1,631 1,651 2,108 742 * 965 *
% change (* Jan-May)   1.20% 27.70%   30.10%

Source: Stats SA

What the above table shows is that defaults, both in number and value against private persons, have fallen over the past two years and this trend has continued in the first half of 2008.

“The insolvency data indicates a deteriorating scenario,” comments Luke Doig ,Senior Economist at Credit Guarantee Insurance Corporation.

“In the case of businesses, both numbers and values of defaults fell last year – quite surprisingly in our opinion – but this has been reversed in the first half of 2008, while liquidation data has only begun reflecting the tougher operating conditions more recently,” he says.

According to Doig, Credit Guarantee’s experience of payment defaults over the past eighteen months has induced them to expect that the tempo of liquidations would accelerate in 2008, perhaps by 20% and higher. In the first eight months of 2008, the number of overdue advised accounts as submitted by their policy holders, rose by 25.2% and the number of actual claims payments has risen by 21.1% over the same period. The value of these claims has increased by 30.9%.

“In the months to come, we foresee that business defaults will continue to rise and the amounts involved may trend higher than currently being experienced,” continues Doig. “Similarly, based on our claims experience across most sectors of the economy and the knock-on effect of the higher default rate against firms, we expect liquidations to trend even higher in the months ahead.”

SMMEs are having the greatest difficulty when it comes to servicing their insurance needs. Due to cash flow difficulties, these entities are most susceptible to terminating both new and existing policies. The liquidation data reveals that company liquidations actually fell by 12.5% in the first half of 2008, while those of CCs jumped by 37.9%.

“Therefore, we would caution all small and medium-sized businesses against cancelling any risk mitigating measures,” says Doig.

Allan Pellow, well-known liquidator and insolvency practitioner from Westrust and Deputy Chair Person of the Association of Insolvency Practitioners comments, “Liquidations and insolvencies have, for the past five to seven years, been very low and accordingly the upturn we are seeing is coming from a very low base. The recovery departments of various financial institutions and other entities have advised that they are experiencing a major upturn in debtors defaulting, resulting in repossession of motor vehicles, houses and other assets.”

According to Pellow, his firm has experienced an increase in activity in regard to companies, close corporations and other failures. Although, it has not translated into a tsunami as predicted, they have received substantially more enquiries from creditors and other parties seeking advice with regard to possible liquidations of companies.

Pellow’s firm has seen 20% more potential liquidations pending than at the same time last year. There has been an upturn in liquidations in the transport and logistics sector but few failures in printing and property development companies.

Pellow points out that the skills shortage in the industry will present some major problems for the economy as insolvencies are certainly a part of the economic system. Furthermore, the insolvency profession is unregulated and the profession has been campaigning for many years for statutory recognition by government.

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