South African business debt conditions under strain

Michelle Beetar, Managing Director of Experian South Africa.

Experian’s Business Debt Index for Q2 shows ‘small businesses are hardest hit’.

Deteriorating financial conditions are putting a strain on South African business’ health, with small businesses in particular struggling to repay debt, according to the latest Experian Business Debt Index (BDI).

The BDI is registering below the zero level at -0.091 - with the zero level distinguishing between improving and deteriorating business financial health. 

“The sluggishness of global economic growth and the poor performance of the South African economy in the first half of 2016 have manifested in a significant negative input into overall business conditions domestically,” says Michelle Beetar, Managing Director of Experian South Africa.

The rise in the average number of outstanding debtors’ days, to 53.5 days in Q2, from 52.5 in Q1, 50.4 in the Q4 and 48.8 in Q3 of last year represent an undeniable trend of rising financial strain.

Also notable was the jump in the number of outstanding debtors’ days in June specifically to 55.0 – the highest figure since Q1 of 2010 when the economy began edging out of the last recession.

Small businesses struggling to repay debt

Interestingly, the latest data on outstanding debtors’ days has seen a large divergence.

There is a sharply rising trend of the ratio of outstanding debt of more than 90 days relative to debts owed of less than 60 days on the one hand, and a falling ratio of debt owed of between 30 and 60 days relative to debts owed of less than 30 days.

The ratio of debt owed of more than 90 days relative to debts owed of less than 60 days rose to 15.4% in Q2 2016, from 14.3% in the Q1, from a low point of 6.6% in Q4 2013.

In contrast, the ratio of debts owed of 30 to 60 days relative to debts owed of less than 30 days lagged by one quarter fell to an all-time low of 14.4% in Q2 of 2016, from 15.8% in Q1 of 2016 and 24.1% in Q4 of 2013.

“This suggests that while the overall financial position of businesses has remained quite sound and the majority are paying off debtors speedily, a growing number of businesses’ financial position has taken such a turn for the worst, with many unable to meet their debt commitments,” says Beetar.

Furthermore, businesses that are unable to pay off debtors within a month have increasingly struggled to meet their commitments in ensuing months as well.

This is prevalent amongst small and medium sized enterprises where the outstanding debtors’ days shot up to 63.65 in Q2, from 57.96 in Q1.

The gap between the 63.65 average outstanding debtors’ days of SMEs and the 53.49 days average outstanding on debts of larger companies represents a marked expansion in the differential inability to meet debt commitments of small as opposed to large companies.

“To some extent this is not an overly surprising result when looking at the rising job losses in the economy in the first half of 2016. These lay-offs are likely from small businesses where many proportionately tend to employ more workers than big business,” says Beetar.

Slight improvements in agriculture and mining sectors

No single sector recorded a positive BDI in the second quarter, with most sectors experiencing deteriorating debt conditions, except for agriculture and mining.

The mining sector received some reprieve in the form of a partial rebound in commodity prices with signs of Chinese economic activity stabilising.

Meanwhile, meteorologists believe that worst of the debilitating drought is over, but there is still the impression that the impact of the drought in depressing domestic economic activity has been underestimated.

Outlook

Despite the latest report findings there are reasons to be optimistic:

• Inflationary pressures have turned out to be less pronounced in the wake of the sharp depreciation of the Rand in the past two years. As a result, earlier expectations of sudden increases in interest rates domestically are not materialising.
• Renewed falls in fuel prices should benefit South Africans from an affordability perspective.

“There are indications that the bottom of the cycle may have been passed and that economic growth in the medium term could improve. This may contribute to the BDI returning to positive levels in the next quarter even though the economy still faces substantial growth challenges,” ends Beetar.