How much worse can it get?

Much has been said recently about the depths to which the domestic economy is likely to sink and the pain that this will inflict upon consumers and businesses alike. Apart from formal company liquidations jumping 23.2% year-on-year in March, January/February, personal sequestrations are 22.1% down on levels a year earlier, while the value of debt judgments against private persons and businesses in the first four months of this year were only 0.7% and 3.3% higher respectively.

This contrasts strongly with our experience at Credit Guarantee; after actual claims payments escalated 56% last year, they were a further 43% higher in the first four months of 2008. In fact, overdue advised accounts (longer than contractual terms) as indicated by our clients from their buyers, were a staggering 56% higher in January - April 2008, leading us to foresee even higher claims in the months ahead.

The impact of higher interest rates on defaults and the bearing this has on the business cycle, depends both on the pace of change of rates as well as the actual extent of the cumulative hikes.

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Firstly, as can be seen from the above, the period over which the medicine was administered (trough to peak in prime), ranged from just over a year to close to two years, while the 1994/1998 period saw an extended period of volatility in rates. Secondly, in most instances, the prime interest rate was hiked by a range of 67% to 110% as part of the policy package, but with consequences for delinquencies as outlined above.

Currently, the tightening in rates began in June 2006 (4 x 50 basis points in the second half of 2006), which was repeated in the second half of 2007 with the last 50 basis point increase occurring in April 2008, bringing the prime interest rate to the current 15%. There are few prognostications for prime to peak above 16%. If there is any comfort to be drawn from this, it is that it will probably take prime of 17.5% to induce severe repercussions on the scale we have seen in the past. At present, there is no reason to expect prime of 17.5% but it cannot be ruled out. Under-recoveries on petrol and diesel hit 87.5 cents per litre and R1-37 cents per litre respectively on 22 May and this will undoubtedly affect costs and inflation outcomes. Further, reports of monthly car repossessions 67% higher year-on-year and our current experience both in terms of payment terms being extended and in actual claims payments, leads us to expect that civil debt judgments will rise substantially in the months ahead and that corporate failures will inevitably spike. Resulting job losses will further impact the economy and so the spiral gathers momentum.

Luke Doig (pictured above right), Credit Guarantee Insurance Corporation of Africa Limited