Experian’s Business Debt Index Q4 2016 shows businesses are managing their financials stringently under the current economic environment

Johannesburg, 15 February 2017 – The Experian Business Debt Conditions Index (BDI) for Q4 reflected a slight upward adjustment with a reading of -0.0341 from -0.0983 in the previous quarter.

“Although the latest reading is still in negative territory, the Q4 change is still a positive development for the BDI as it suggests we may be approaching the turning point of improved business debt stress conditions in the next quarters,” says Simon Russell, Managing Director of Experian South Africa. “The slight revision also indicates that businesses are managing their finances reasonably well under the current circumstances.”  

The Experian BDI is an indicator of the overall health of businesses and the position of debt settlement between businesses in the economy. The zero line on the BDI distinguishes between improving and deteriorating business debt stress levels. 

Due to a number of macroeconomic factors, the BDI continued to remain below the zero line in the last quarter. Some of these factors included a slowdown in global economic growth in Q4 combined with stagnant domestic growth. Additionally, the difference between the PPI and CPI inflation rates, which can be used as a proxy for profit margins, deteriorated slightly and there was also no change in the ratio between domestic and foreign interest rates.

 

Declining outstanding debtors’ days

However, the decline in outstanding debtors’ days suggests that the BDI is approaching a turning point.  

In the fourth quarter, the average number of debtors’ days declined to 47.0 from 49.7 in Q3 and 49.9 in Q2 respectively. The Q4 level was the lowest average for any quarter since Q4 2013 – and the lowest in three years.  

Encouragingly, the ratio of outstanding debtors’ days of more than 90 days to less than 60 days, declined quite sharply in Q4 2016, implying a decline in long-term outstanding debt.

“While these changes in business debt metrics are certainly positive, the macro-economic environment in Q4 was not sufficiently supportive to push the index into positive territory,” says Russell. “As such, the latest outstanding debtors’ days’ figures appear to represent the tighter debt terms that are being placed on businesses to pay their dues in a shorter period.”

There were marginal improvements in the business debt conditions for community services and transport. However, agriculture, construction, finance, manufacturing and mining sectors reflected marginal deteriorations.

Taking a closer look at agriculture, the lagged impact of drought continued into the last quarter of 2016. Mining registered a positive reading on the BDI as the conditions reflected a situation of substantial recovery from an extremely depressed situation in the preceding two years.

 

Outlook

While South African business conditions remain under strain, there are reasons to believe that the coming months will offer some improvement, according to Russell.

Some of these include improved rainfall in the North Eastern regions of South Africa that will help to alleviate drought conditions. The resultant recovery should boost economic activity.

The industrial action experienced in South Africa over recent years has settled down and should encourage growth and employment. From a financial perspective, consumers – and businesses – will receive some respite from the strengthened Rand over the past year, with inflation being lower than that anticipated in 2015.

On the commodities front, a rebound in prices in 2016 - following the declines of 2014 and 2015 - should assist with boosting export revenues and making imports more expensive. This will help to improve the balance of trade markedly.  

There is the concern that domestic and international political volatility could have knock-on effects on business confidence more generally. “Even so, it would appear as though businesses locally have prepared themselves for such volatility by ensuring relatively solid balance sheets. Up to a point, the BDI tells us that they should be able to survive should this volatility occur,” ends Russell.

 

Editors notes:

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.co.za

 

Leigh-Anne Sa Joe

Meropa Communications

+27 11 506-7300

LeighAnneSJ@meropa.co.za

 

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