Key highlights

  • Debt conditions for SA businesses positive in Q4 2018 but lower than previous quarter’s reading
  • Business debt for agriculture struggles from delayed impact of drought
  • Small businesses take greater strain with outstanding debtors’ days increasing

Johannesburg, 27 February 2019 – Anticipation of weaker GDP growth in the final quarter of 2018, is reflected in Experian South Africa’s Business Debt Index (BDI) where business stress levels in the last three months of 2018 declined moderately from the previous quarter on the back of deteriorating macro-economic factors. The Experian BDI, however, remained positive at 0.209 from a reading of 0.351 in Q3 2018.

“After a relatively tumultuous start to the year that involved forecasts of lower economic growth and an unstable electricity supply, the last three months of 2018 reflect a slowdown on many fronts,” explains David Coleman, Chief Data Officer at Experian SA.

High frequency data released on mining and manufacturing production as well as wholesale and retail trade was all down, suggesting a likely marked slowdown in the growth of the economy in Q4 2018 compared with Q3 2018. A reduction in the spread between the yields on long-term interest rates and the repo rate also contributed to the deterioration of macro-economic factors making up part of the BDI index. Global economic growth was also affected by fears of the impact of higher tariffs on goods imported by the world’s largest economies.

Debt age ratio

The 60:90 day ratio of debt owed (outstanding debt owed of 60 to 90 days relative to debt owed of less than 30 days) declined to its lowest level in 2018 at 6.1% from 7.3% in the two preceding quarters. “This contributed to the Experian BDI Q4 2018’s positive results,” says Coleman. He explains that this, however, could be due to tighter loan terms which were previously being extended at 120 days, being decreased to the 60-90-day period.

BDI by sector

Business debt conditions in community services, construction and transport all showed improvement while electricity, financial services, manufacturing and mining sectors deteriorated.

The agricultural sector, however, fell back sharply into negative territory. “The delayed effects of drought conditions in the Western Cape, coupled with the onset of the renewed drought in the north-western regions of South Africa contributed towards this fall,” says Coleman.

The mining sector also experienced a sharp fall in Q4 2018. According to Coleman, “the expected negative impact of strike activity and renewed load-shedding will continue having adverse effects on this sector’s performance in the coming months”.

Business debt conditions deteriorate for small and medium enterprises (SMEs)

SMEs continued to take the greater strain of the tougher economy with the average number of outstanding debtors’ days increasing to 58.8 in Q4 2018 from 56.6 in Q3 2018. This was almost as high as its recent historical peak of 59.6 days in Q2 2018. “With outstanding debtors’ days approaching 60, many SMEs are experiencing tighter pressure on their cash cycles,” explains Coleman. “Small businesses are facing a tougher time in the sluggish economic environment.

Outlook

With economic growth forecasts below 1% for the full year 2018 and just 1.2% for South Africa in 2019, it is likely that the BDI will decline in the coming quarters. “However, this will not result in a significant collapse in business debt conditions but rather a slower rate of improvement,” explains Coleman. Recent events such as energy security as well as the global slowdown all point to greater downside risks.

Editors notes:

*Debtors’ days is a metric of time measuring the average outstanding period (in days) that businesses take to repay their debt. A higher debtors’ day value points to an environment where firms are taking longer to repay their outstanding debt obligations.

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

Contact:

Taryn Stanojevic

Experian South Africa

+27 11 799 3434

Taryn.Stanojevic@experian.com

Rebecca Rabodiba

Meropa Communications

+27 11 506 7300

RebeccaR@meropa.co.za

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