BDI shows stressed business debt conditions remain

Michelle Beetar, Managing Director of Experian South Africa.

The Experian Business Debt Index (BDI) for the first quarter of 2016 shows that South African business debt health improved slightly, although it is still close to the zero level, which distinguishes between improvement and deterioration in business debt conditions.

Contrary to the expectation in the previous quarter that the BDI would probably fall below the zero level in the next period, the BDI edged slightly upwards in Q1 2016.

“Although businesses are experiencing increasing levels of debt stress, the economy is not collapsing,” says Michelle Beetar, Experian South Africa Managing Director. “We have seen producer prices accelerate relative to that of consumer prices, while marginal growth was observed in the first quarter. This implies that many manufacturers have been trying to claw back margins following the precipitous depreciation of the Rand last year by raising their prices faster than before.”

Long-term interest rates remain significantly higher than short-term interest rates – another optimistic sign that enduring economic growth prospects remain more upbeat than those in the shorter-term, although the gap between the two narrowed slightly in this past quarter.

Domestic interest rates have also risen relative to foreign interest rates, which should assist in attracting foreign capital into South Africa, helping to stabilise the Rand and minimise the need for a continued rise in interest rates, Experian’s analysts maintain.

Several crucial factors have impacted the improvement levels:

• the loss of business confidence over the past year, has slowed investment spending;
• the fall in the Rand due to key political developments;
• the resultant increase in inflationary pressures compelling interest rates to rise, which has placed additional financial strain on both individuals and businesses;
• declining commodity prices have resulted in a drop in export revenues; and
• drought conditions have led to a shortage of food supplies triggering inflationary increases.

Despite all these headwinds against economic growth, there have been indications that the economy is not collapsing, even if it is not growing at more than a very pedestrian pace.

Much of the fact that the South African economy has not been collapsing can be ascribed to businesses building up substantial cash reserves instead of spending heavily on capital projects, which are insulating them against the ravages of sustained slow growth.

Debtors’ days

The average number of outstanding debtors' days in Q1 2016 rose again – from 50.4 in the final quarter of last year to 52.4 days, pushing them to the highest number since Q3 2010.

Similarly, the ratio of debts owed for more than 90 days relative to debts owed for less than 60 days rose dramatically to 14.3 in Q1 2016 from 11.1 and 12.1 in Q3 and Q4 of 2015 respectively – the highest ratio since the global financial recession in Q1 of 2009.

The majority of business balance sheets remain relatively healthy for now despite evidence that more businesses are under acute strain in the current environment of low growth and rising interest rates.

“The fact that the number of outstanding debtors’ days is gradually increasing, albeit by marginal amounts, is concerning as they are indicative of businesses struggling to pay their debts, similar to circumstances observed before the 2008/09 global financial crisis,” says Beetar.

Agriculture struggles while some sectors make a slight recovery

The agricultural sector has deteriorated significantly due to the crippling impact of the drought. The BDI for the construction, services and electricity sectors also placed them in negative territory, as they continued to experience deteriorating business conditions.

However, some sectors – transport and communication, mining, finance and business services, wholesale and retail trade, and manufacturing – showed an improvement in business debt conditions, compared to the last quarter when eight out of the nine sectors deteriorated.

Outlook

The BDI shows that while the economy keeps sailing close to recessionary conditions, there is potential for some partially positive movement.

“Businesses would be advised to remain cautious as the economy is not out of the woods yet. That being said, however, there is hope for positive or at least horizontal movement in the coming quarter,” adds Beetar.