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Businesses in distress?

31 March 2014 Luke Doig, Credit Guarantee
Economic comment by Luke Doig, senior economist, Credit Guarantee Insurance Corporation.

Economic comment by Luke Doig, senior economist, Credit Guarantee Insurance Corporation.

The question has to be posed as to whether the sharp uptick in credit extension to businesses of 12.6% year-on-year in February from 11.1% in January and 7.5% for calendar 2013, is not a signal of ‘distress borrowing’.

On the flip side, credit extension growth to households fell to 5.2% year-on-year in February (January 5.6%) from 8.3% in 2013 as individuals are forced to tighten their financial belts.
 
The rate of growth in ‘other loans and advances’ (comprising 39.2% of all credit extended to the private sector) rose by 14.1% year-on-year in February from 12.5% a month earlier.
 
"Our leading payment default indicator has jumped 76.3% in value in the first quarter of the year and claims have similarly risen substantially,” emphasises Doig. The overall health of the business operating environment appears bleak at present with little immediate prospect of any alleviation. The ongoing platinum sector strike and the threat of further labour disruptions as the year unfolds, implies that growth may well battle to better last year’s 1.9% outcome and that the current account deficit may struggle to shrink as fast as it should. This, in turn, places the country’s sovereign rating at risk, notwithstanding the stabilisation in the fiscal outlook. If indeed the latter is threatened by excessive public wage sector demands, then a rating cut could further weaken the currency. The worrying aspect is that the country may not then be able to take advantage of this price competitiveness.

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