- Business debt stress levels for Q1 2018 remained in positive territory despite slight decrease
- Debt stress levels decreased for agriculture and mining, but improved for service sectors
- Moderation in the Experian BDI is expected, reflecting continued improvement of business conditions, but a slightly slower pace
Johannesburg, 21 May 2018 – Business debt stress conditions in South Africa continued to improve in Q1 2018 with the latest Experian Business Debt Index reading of 0.360. This represented a slowdown in the rate of improvement in business debt conditions, from the previous quarter’s 0.430, but remains substantially elevated against recent historical values.
“Although the first quarter Experian BDI’s reading is slightly lower than the fourth quarter, the BDI, as it stands, is the second-best reading in four years. It continues to be supported by improved macroeconomic conditions made possible by a marked turnaround in economic growth in South Africa and abroad,” says David Coleman, Chief Data Officer at Experian SA.
Economic growth received a boost from the lagged effects of drought conditions coming to an end in the agricultural sector and the sharp recovery in the mining sector following a dismal 2016. The lower than anticipated headline inflation rate on the back of a continued reduction in food inflation, subdued fuel prices and the stronger rand played a role in assisting the economy and consequently the BDI’s performance. The fall in inflation has also led to lower intertest rates which further improved business debt conditions in Q1 2018.
The first quarter BDI for 2018 also benefited from the sharply lower producer price index (producer inflation rate) which came in below the consumer price index (consumer inflation rate); thus allowing for improved business margins that could benefit from the rate of increases with their cost structures tracking lower.
“All of these factors were further boosted by the improved business confidence that followed from the change in leadership in the country. Optimistically, improved confidence will see businesses commit more working capital. However, this may have the unfortunate consequence of delaying payment of existing debt,” says Coleman.
Debt age ratio
Given that the macro economy improved in Q1 2018, a significant contributor to the decline in the overall BDI was The debt age ratio – the ratio of debt owed of between 60-90 days relative to debt owed of less than 30 days – which increased sharply to 6.8% in Q1 2018 from 5.5% in the previous quarter. Despite increasing in Q1 2018, the ratio was still lower than the ratios recorded in2012 and 2015.
BDI by sector
From a sectoral perspective, sharp declines in the BDI for agriculture and mining contributed to the deterioration in the overall BDI. This fall back is largely a process of normalisation following the previous quarters where both sectors showed a pronounced recovery.
The debt profile in the agriculture sector worsened due to the drought in the Western Cape, which has resulted in financial strain amongst farming communities, exacerbating difficulties by the agricultural sector in meeting loan repayments. There was also a decline in the BDI for mining, which was largely statistical, coming off a high base from the previous quarter.
The BDI reading improved for community services, which is primarily composed of government. This is linked to the reduction in time by government department payments for services rendered. Other services sectors such as finance and retail trade also recorded an improvement showed significant improvements. The increase in the BDI for retail and wholesale trade correlates with the strong performance of retail sales in Q4 2017.
Construction and transport reflected a continuing deterioration in business debt conditions and reflects the cut back in public sector infrastructure investment. The uncertain financial state of state-owned enterprises means a reluctance to extend themselves financially on investment projects.
While the sharp improvement in business confidence in the first three months of 2018 strongly suggest an improved BDI in the next quarter, it is likely that this will not occur. The upward revisions to economic growth in the second half of 2017 would see growth moderating in the initial quarters of 2018. This, together with the fall in US economic growth as well as data on SA’s main economic sectors of mining, manufacturing and electricity production, retail and wholesale trade sales point to the likelihood that economic growth in South Africa will normalise during 2018.
“Furthermore, if businesses continue to commit funding to their operations in a more conducive growth climate, it is conceivable that they will be more pressed to extend the repayments of their debts. In line with this concept, the BDI will see a slight further slowdown in improved BDI for the next quarters,” says Coleman. As such, the BDI is expected to show a sideways movement in the next quarter before declining as the economy stabilises.
The moderate outlook in the next quarter is likely to be in line with the renewed weakness in the rand with potential inflationary pressures which will be exacerbated by the increase in the rate of VAT and sharp escalation of world oil prices, which will hamper global economic growth.
The Experian Business Debt Index is an indicator of the overall health of businesses, as well as the South African economy. It measures the relative ability of businesses to pay their outstanding creditors on time. It also incorporates trends in macroeconomic indicators, insofar as these impact on the ability of companies to pay their creditors.
How to interpret the index: the index is constructed around a mean value of zero. Values above zero indicate less business debt stress and values below zero indicate business debt stress. Higher interest rates result in higher borrowing costs and an increase in business stress. Relatively higher production costs vs consumer costs decrease operating margins of business, while higher domestic and international growth could result in a better trading environment for businesses.
The Experian Business Debt Index (BDI) is constructed using principal components analysis. This is similar to the St. Louis Fed’s Financial Stress Index (STLFSI) and the Kansas City Fed’s FSI (KCFSI) in the USA.
The principal components analysis is a statistical method that is used to extract factors responsible for the co-movement of a group of variables. As such, it is assumed that the business stress is the primary factor influencing the co-movement and by extracting the principal components, it is possible to build and index with a useful economic interpretation.
For a more detailed analysis of business debt stress, Experian releases a Business Debt Overview report. The Business Debt Overview report constitutes of three main sections: the Business Debt Stress Index, a macro-economic overview and a sectoral debt analysis.
Prepared by Meropa Communications on behalf of Experian SA
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