South Africa, 03 September 2014 – Experian SA and Econometrix today released South Africa’s Experian Business Debt Index (BDI) for Q2, a vital and unprecedented indicator of the overall health of businesses, as well as the South African economy. The Experian business debt stress indicators for South Africa show that debt stress amongst businesses deteriorated in Q2 2014.
“The Experian BDI declined in Q2 compared with Q1, from a reading of 0.4997 to 0.2840,” says Michelle Beetar, Managing Director of Experian SA.
The decline in the BDI for Q2 of 2014 is in line with predictions reported on the Q1 reading in May, which expressed the view that in the event that the platinum mining strikes were to continue, which it did for the full duration of Q2, there was likely to be an impact on business conditions.
“Interestingly, this did not impact on businesses’ ability to keep up with repayments,” says Beetar. “The evidence suggests that there was no marked deterioration in the repayment of debts by businesses in Q2. “
The average number of outstanding debtor days in fact improved marginally to 46.6 days in Q2, from 46.9 days in Q1. The ratio of outstanding debts of more than 90 days decreased relative to those outstanding of less than 60 days, to 7.4 times in Q2.
“One explanation for this decrease is due to the interest rate increases which occurred in January - a first such increase in interest rates in more than six years. Expectations of further interest rate increases later on in the year might have encouraged businesses to reduce outstanding debts more speedily in order to prevent the potential interest burden from escalating.” Beetar explains.
Despite the decline of the BDI, the Q2 reading was still significantly above the 0.0 level which distinguishes between improving and deteriorating business debt conditions and indicates the financial state of businesses as still improving albeit much more slowly than previously.
The difference between the PPI inflation rate and the CPI inflation rate expanded marginally in Q2 compared with Q1, indicating that businesses were still able to pass on cost increases in order to recoup profitability in a difficult environment.
Global economic conditions appeared to pick up momentum in Q2, led by the unexpectedly sharp increase in the US economic growth rate, to an impressive 4.2% on a q-o-q annualised basis. This was partly neutralised by a lacklustre performance by the European economy.
Promising global conditions augured well for an improvement in exports by the domestic economy to be supported further by the enhanced competitiveness arising from a Rand which was 30% lower in real terms than three years ago.
“The domestic economy also managed to recover to positive GDP growth in Q2. Although still extremely weak, at 0.6%, q-o-q annualised GDP growth domestically posted an improvement compared with the negative growth of -0.6% recorded in Q1,” notes Beetar.
Despite this slight improvement, the breakdown of GDP growth by sector in Q2 indicated that the impact of the platinum mining strike became far more widespread. Besides the anticipated decline in mining and manufacturing production, there was also a substantial reduction in the GDP growth rate of the retail and wholesale trade, restaurants and accommodation sector, as well as a decline in the growth of the financial and business services sector.
“This suggests that businesses in many other industries in the economy started to feel the after-effects of the platinum mining strike.” Beetar adds.
“The termination of the platinum mining strike at the end of June was immediately succeeded by a full month's strike in the metals industries in July. The latter strike incorporated businesses in many industries, spreading the impact of the spate of industrial action in the country across most sectors. These developments are more than likely to contribute to downward pressure on the Experian BDI in Q3 2014.” Beetar concludes.
· 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 cost 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; and
·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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