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Economic comment by Luke Doig - Debt defaults projected to increase by 30%

23 January 2008 Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation

The New Year has kicked off in dramatically poor fashion, and petrol prices appear set to be hiked by around 15c per litre in February. Business managers will have to be very watchful of their debtors in the months ahead to ensure that payments are received as per terms.

“Given the current business climate and the toll that higher input costs and interest rates are expected to take, we at Credit Guarantee foresee debt defaults possibly rising 30% in value terms this year with at least 10% more firms failing to open for business as a consequence,” says Luke Doig, Senior Economist at Credit Guarantee Insurance Corporation.

To date the civil debt data is an anomaly. Despite seven interest rate hikes (at that stage), debt judgments in November 2007 were 31.8% lower in value terms and 10.7% down in the first eleven months of the year.

“This contradicts rather sharply with our experience in insuring business-to-business credit transactions,” continues Doig.

“Liquidation data from Statistics SA indicates that on average, 268 businesses closed their doors every month in the first 11 months of last year. Considering our own experience of advised potential claims (overdue accounts) and actual claims payments, we expect that the official December 2007 failure rate may have topped 320 enterprises, up from November 2007's 194 and 266 in December 2006. This is despite December traditionally being a slow administrative month and the variability that the figures have displayed since the civil service strike in mid-year. This would bring the 2007 total to around 3268 or 8% above 2006 levels,” concludes Doig.

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