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South African businesses demonstrate resilience in challenging economic environment - Experian Report

15 April 2024 Experian

South African businesses are demonstrating resilience and adaptability in the face of a challenging economic environment. This is according to the latest Experian Business Debt Index (BDI), an indicator of business health and the overall state of the South African economy.

The BDI, which measures the business conditions in South Africa relative to the macro-economic environment and the ability of businesses to pay their creditors on time, rose marginally in Q4 to 0.364 from 0.148 in Q3. This is reflecting some resilience on the part of the South African economy and the ability of businesses to cope with a low-growth environment.

“What has contributed towards improving business health is that interest rates remained stable for most of 2023 instead of rising continuously from quarter to quarter as they had in 2022,” says Jaco van Jaarsveldt, Experian’s Head of Commercial Strategy & Innovation.

Having increased by 4.75% from November 2021 to March 2022, the absence of further increases in debt servicing costs beyond the early part of last year prevented further erosion of business profitability.

Also contributing to the stability of business debt conditions was the fact that domestic economic growth, whilst weak, continued to be relatively stable. GDP growth increased to 0.1% on a quarter-on-quarter basis in Q4, from negative growth of -0.2% in Q3.

The reduction in the intensity of electricity load-shedding in Q4 and the improvement in logistical bottlenecks at South African ports, which had previously impeded the delivery of supplies to various parts of the country and hindered exports, were important contributors to this stabilisation of economic performance. More significantly, all of mining, manufacturing, and electricity production saw growth picking up meaningfully in Q4 from the slumps they experienced during Q3. Much of this can be attributed to the improved environment in respect of electricity production and supply bottlenecks at South African ports.

GDP growth a key driving force in the uptick of the BDI
Despite noticeable signs of consumer credit health deterioration, the resilience in employment may have indirectly bolstered consumer spending. In Q4, employment saw a robust 4.9% year-on-year growth, significantly outpacing the GDP growth of 1.2%.

Van Jaarsveldt adds, "In the wake of the COVID-19 pandemic, it seems that businesses are beginning to rebuild their teams, recognising the importance of maintaining economic activity and creating new job opportunities."

The key driver for the BDI uptick in Q4 was undoubtedly the improvement in GDP growth in South Africa. The influence of other macroeconomic variables on the BDI was comparatively minor, underscoring the critical role of GDP growth in driving business debt index trends.

SMEs display encouraging growth trend
In Q4, small businesses showed a notable improvement in their debt conditions compared to the broader sample of businesses. This trend aligns with the decrease in unemployment under the expanded definition, as observed in the same quarter and throughout 2023. It appears that the SME sector has achieved some stability following the significant challenges posed by the COVID-19 pandemic. This is evidenced by the decrease in the average number of outstanding debtors’ days amongst small businesses, which dropped to 52.1 in Q4 from 54.7 in Q3.

Optimistic outlook, despite challenges
The first quarter of 2024 has shown signs of economic improvement, according to preliminary forecasts. The prospect of increased investment in renewable energy projects and grid transmission will assist in providing a further boost to overall economic growth in 2024, to take GDP growth to levels of 1% or more for the year compared with just 0.6% growth achieved in 2023.

Some improvements are also expected at the ports, with Transnet’s new leadership working hard to ensure cargo moves efficiently, which will help boost economic activity.

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