Overall, South African businesses are less stressed by debt than previously.
Experian SA and Econometrix today launched South Africa’s first ever Business Debt Index (BDI), a benchmark for the interpretation of the state of business’s debt-paying abilities.
The Experian BDI is an indicator of the overall health of businesses, as well as the South African economy. It measures the relative ability for businesses to pay outstanding creditors on time and tracks macro-economic indicators that can impact on the ability of companies to pay their creditors. A number of debtors and macro-economic variables are combined into a single indicator of business debt stress.
The Experian BDI will be published on a quarterly basis. The Q4 2013 BDI shows that the debt stress amongst businesses continued to fall in the final quarter of last year, but did not do so at an extraordinarily rapid pace. The rate of improvement in business stress remained more or less constant compared with Q3 2013.
“The financial health of businesses seems to be much more stable,” says Michelle Beetar, MD of Experian SA. “This is reflected in the continuing decline in the average number of debtors’ days. The debt age ratio has also been declining significantly.”
Although average debtors’ days for businesses in South Africa increased slightly from 45.7 days in Q3 2013 to 46 days in Q4 2013, the year-on-year growth fell sharply to -2.8% in Q4 from another steep contraction of -2% experienced in Q3 2013.
“This is a distinct indicator of the sharp fall in credit risk premiums that should be attached to the domestic business sector,” says Beetar.
Consistent with the fall in average debtors’ days growth, was the relatively sharp decline in the debt age ratio in Q4 2013. After falling from 10.8 to 9.5 between Q1 and Q2 2013, the debt age ratio declined further to a reading of 6.9 in Q3 and 6.2 in Q4 2013. This represented a steep -27% decline on a year-on-year basis.
“The declining trend in the debt age ratio is an indicator that total debt owed in the greater than 90 days’ age spectrum is falling faster than that in the less than 60 days’ debt age categories. This is consistent with a decline in systemic credit default risk for businesses in the fourth quarter of the year,” says Azar Jammine, director and chief economist at Econometrix.
“It is also ironically in part a function of the relative lack of business confidence in the longer-term future of the South African economy. This has resulted in businesses refraining from undertaking substantial capital investment,” says Jammine.
Further evidence for the lack of business stress is the continuing overshoot of growth in corporate taxation compared with government’s budget. This may be a temporary phenomenon and it might just be a matter of time before stress in the form of reduced corporate tax revenue, emerges, but for the present it remains a positive reflector of on-going “business as usual”.
From a broader macroeconomic perspective, there are positive developments which are making life for many businesses somewhat easier than previously.
“There are growing signs that the global economy is picking up some momentum. Given the high correlation between the growth of South Africa’s economy and the growth of the world economy, the improved growth of the latter augurs well for some amelioration in the domestic economy and local business conditions more generally,” Jammine says.
On the production side of the economy, these benefits are being further enhanced by the sharp depreciation of the Rand over the past two years, which has resulted in its real value being some 30% below that which prevailed in mid-2011.
This must surely render South African producers much more competitive so long as costs do not increase subsequently at a pace which neutralises the increased competitiveness from exchange rate depreciation.
Nonetheless, the relative absence of a substantial inflationary build-up in the wake of the Rand’s fall would appear to be starting to squeeze margins of businesses, as reflected in the fact that the rate of inflation of producer prices has progressively increased relative to that of consumer prices in recent months.
Linked to the increase in inflationary pressures emanating from the fall in the Rand, interest rates have begun to rise for the first time in almost six years. With further such increases in store, unless there is an unexpected and sharp improvement in the Rand, one may well start seeing the relatively light business stress of 2013 increasing over the course of 2014, causing the BDI to decline as the year progresses.
