Insolvencies plummet … promising pointer to economic revival

Great news for South Africa’s economic outlook is that the number of reported insolvencies has declined to a level last seen two-and-a-half years ago.

“The trend is certainly positive”, says Adam Harris, a Director in the Insolvency and Restructuring department of corporate law firm Bowman Gilfillan Inc.

“And it’s good news for individuals, unless you happen to be a trustee who takes appointments in insolvent estates.”

The figures reflect both voluntary and compulsory proceedings.

Insolvency statistics – generally considered to be one of the key readings reflecting the temperature of the economy – were released by Statistics South Africa this afternoon.

Significantly, says Harris, notably fewer people were forced into insolvency.

“The number of insolvencies – a statistic covering individuals or personal estates – showed a substantial 32,8% decline for the nine months to September 2010, compared with the same period last year. September alone showed a particularly marked improvement, with a year-on-year decrease of 27,6%.”

Harris observes that the Stats SA graphs reflect an upward trend in the number of insolvencies going back to July 2007, which trend has, however, been tapering off since peaking in August last year. He notes that the present position is still a long way off the lows reflected in early 2006.

“My view is that there has been a positive, cushioning effect provided by the National Credit Act (NCA), which was aimed at preventing the over-indebtedness of consumers. This has to some extent limited the number of people who would otherwise have had credit virtually thrown at them until they could no longer survive by borrowing from one to repay the other.”

The NCA obliges a credit provider to evaluate the creditworthiness of a potential customer before money is lent to the customer.

Leavening the good news on the insolvency front is that the statistics for liquidations among companies and close corporations are not as encouraging as those for individuals and personal estates.

“In fact,” says Harris, “the trend is still upwards. There has been a small 1,8% increase in the number of liquidations for the first 10 months of the year compared to the same period last year. Looking at the month of October in isolation, however, the stats show a 10,4 % increase over October last year.”

Hardest hit, as reflected by the highest number of liquidations during the first ten months of the year, were businesses in the financing, insurance, real estate and business services industries.

“Despite the anticipated positive effect of the World Cup, the wholesale and retail trade, and catering and accommodation sectors were also badly affected. These sectors comprised in excess of 960 business entities that failed – some 29% of all liquidations reported during the period.”

Harris points out that the insolvency and liquidation statistics always reflect a historical position. “The insolvencies only reflect the first nine months of the year, and liquidations the first 10 months. But the trends are clear.

“Based on these figures – and this is only one component of the picture – the patient is no longer on life support. Even so, I would be wary of excessive spending on the celebrations as yet.”