Economic comment by Luke Doig, Senior economist CGIC

Statistics SA today released liquidation figures, showing that corporate failures increased 4.7% year-on-year in April 2008 and 10.5% in the first four months of 2008. This follows hard on the release of worse than expected April CPIX (Consumer Price Index less interest rates on mortgages) and Producer Price Inflation figures of 10.4% and of 12.4% respectively, as well as 1^st quarter of 2008 Gross Domestic Profit (GDP) figures of 2.1% which were to be expected in our opinion but nonetheless a sharp slowdown from the previous four years.

We at Credit Guarantee have made much of the fact that our own experience in terms of advised overdue accounts and actual claims payments is far in excess of the official figures relating to both debt judgments and sequestration data. We stand by that view; if one takes into account the warnings from many retailers and financial institutions of the pain they are beginning to witness, then our early warning indicators are intact, both in terms of timing and in likely impact.

Total Number of liquidations according to industry

Source: Stats SA

Sector-wise, the first four months have been kinder to construction firms although manufacturing closures have risen 49%. The worst afflicted sector number-wise is that relating to wholesale and retail trade, catering and accommodation, which has seen 37% more failures so far this year. With imminent rate hikes in the offing, a further squeeze on disposable income from higher fuel costs amongst others and negative impacts from socio-political developments, then this sector is likely to face headwinds into 2009.

We believe that warnings from Governor Mboweni as to the extent of future interest rate increases should be heeded. An interest rate increase of 100 basis points at the June Monetary Policy Committee meeting is a very strong likelihood; a move of 200 basis points would be reactionary in our view and have disastrous results for sequestrations. However, the possibility of prime reaching 16.5% - 17% in the near term now has a more than even chance of seeing the light of day. Businesses that are over-geared in the current environment are going to experience even more strain. Those concerns that are not proactively collecting payments on time and managing all credit lines, are also likely to feel increasing pain as the year unfolds.

One possible silver lining relates to the manufacturing sector and the issue of capacity utilisation. Capacity utilisation has increased over the last four years as indicated below due to the robust demand experienced.

2004 84.4%

2005 85.5%

2006 85.9%

2007 86.2%

Source: South African Reserve Bank

Many plants have had insufficient attention focused on maintaining and improving their productive capacity of late as they have sought to benefit from the high growth period. Whether it be from forced shutdowns from electricity blackouts or reduced demand going forward, all and any opportunity should now be utilised to conduct possible over-due maintenance or upgrades. Capital and input costs are rising steeply so astute buying will have be the order of the day here.

Luke Doig, Senior economist CGIC, pictured above right