Decline in overall debt stress for business is encouraging

The debt stress level among South African businesses improved in the second quarter of 2013, according to the latest KreditMetrix report, published by Experian SA and Econometrix on a quarterly basis.

Average debtor’s days for businesses in South Africa fell from 48.7 days in the first quarter to 48.1 days in the second quarter. This also represents -6.4% decline year-on-year.

There was also a reversal in the growth trend in the debt age ratio – the ratio of debt owed for more than 90 days as a percentage of debt owed less than 60 days. After rising from 8.5 to 10.7 in the first quarter 2013, the debt age ratio fell back to 9.7 in the second 2013.

According to David Coleman, head of analytics at Experian SA, the rising trend in debt stress levels that ensued since the second quarter of 2012 has changed course and is now more in line with the overarching downward trajectory that began in the third quarter of 2008, which was prompted by the sharp reduction in the repo (policy) interest rate.

“The improving global economic growth prognosis, especially with macroeconomic data coming out of the Eurozone pointing to signs of renewed growth, should impact positively onto domestic economic growth momentum,” said Coleman.

“In turn, this should sustain the declining trend in domestic business to business debt stress indicators. Furthermore, improving growth momentum in advanced economies, including all of the US, Japan and Eurozone, is likely to impact positively on domestic industrial activity levels as external manufactured and primary product demand recuperates,” he said.

While the improved global economic prognosis will garner further support for commodity prices in the shorter to medium term, the extent to which this will translate into positive growth for the mining sector is made uncertain by the persistent operational risks within the sector.

Overall, while it can be expected that improving global economic momentum would impact positively onto domestic economic growth, this is likely to be held back to some extent by the mining and electricity sectors in the shorter term. Undoubtedly, this will weigh on overall economic growth momentum. While business debt distress levels should continue to moderate going into Q3 2013, this process is likely to remain gradual.