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Economy: A range of contrasting indicators

11 August 2014 Luke Doig, Credit Guarantee
Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation.

Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation.

Currently there are a range of contrasting indicators regarding the health or otherwise of consumers and businesses alike. Official liquidation statistics reveal a 21% decline in the first half of 2014 compared to the first half of 2013, with personal sequestrations down 3.3% over the same period. National Credit Regulator statistics reveal that while the credit standing of good consumers rose to 55.8% in the first quarter of 2014 from 51.9% the previous quarter, that of the remaining 44.2% regarded as impaired, a sharp deterioration of 3+ months in arrears was seen (to 32.4% from 20.1%). Year-to-date May debt judgments against businesses were 20.4% lower at R431.5 million.

While traditionally the early part of any new calendar year often experiences an uptick in payment defaults, this was particularly severe this year. Furthermore, the deterioration arrived earlier than normal, exacerbated by a number of excessively large defaults and a rising trend of corporate fraud. Our default payment leading indicator (overdue advised accounts from policyholders) was 15.5% and 52% higher in number and value respectively in the first half of 2014. Similarly, our claims experience was 13.8% and 23.6% worse in number and value respectively. Note that this comes of a 119.5% hike in domestic claims payments in calendar 2013 which was impacted by one of the largest corporate defaults in history, namely that of the First Tech group.

Currently, the pharmaceutical, food, building, construction and steel industries have been particularly hard hit. The steel industry is yet to return to full functionality and the fallout from the strike is set to yield further casualties. Following on the 127.6% rise in average claims values last year, 2014 has seen a continuation of this trend.

We have noted a return to more normal levels in our internal adverse indicator of late but we retain a cautious view. The outlook for the remainder of the year is mixed. GDP growth is unlikely to exceed 1.5% and is at risk from further strike action. Also, a strong bounce is not likely in 2015. Rating downgrades are possible, which would weaken the rand while inflationary pressures and higher Eskom tariffs will all add to margin squeeze and threaten consumer spend. While we believe that the worst may be behind us, the risks remain elevated.

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