Johannesburg, 29 May 2014 – The Experian Business Debt Index (Experian BDI) shows that debt stress amongst businesses continued to fall in Q1 2014, marking a third consecutive quarter of improvement.
This was despite the fact that the domestic economy appeared to be severely negatively affected by the strike in the platinum mining industry which began in the final week of January 2014.
“In the wake of the resultant sharp decline in annualised GDP growth to -0.6% in Q1 2014 from 3.8% in Q4 2013, one might have expected to see a deterioration in business debt conditions during the quarter, but the opposite turns out to have been the case,” said Michelle Beetar, Managing Director at Experian SA.
Exports perform well
There are a number of reasons to account for the relative improvement in the index. Although the global macroeconomic environment did not sustain much of an improvement through Q1, part of the feebleness of that environment was attributed to weather-related factors. As such, exports were not as negatively affected as one might have anticipated, with businesses abroad building up inventories to accommodate a latent upswing in demand.
Excluding Mining and Manufacturing, GDP growth improved marginally
Though the mining strike negatively impacted both the mining and manufacturing sectors, the remainder of the economy was nowhere near as severely affected with some sectors posting modest improvements. The construction sector improved by 4.9%, agriculture by 2.5%, trade by 2.1% and finance improved by 2.0%.
“Producers specifically benefited in the domestic environment by virtue of the fact that they were finally able to achieve revenue increases from price hikes at levels well in excess of the CPI inflation rate. They were able to enjoy for the first time in many years a modest increase in the interest rate earned on their cash balances,” Beetar said.
Sharp decline in average debtors’ days in February and March
The business debt index received a strong boost from the fact that outstanding debtor days continued to decline over much of Q1 (with the exception of January 2014) as they have been doing for the past five years. The number of debtors’ days outstanding declined, and the duration of outstanding debts shortened considerably in February and March.
As a result, the year-on-year growth rate in average debtors’ days in Q1 2014 improved slightly.
“This seems counterintuitive, given the sharp decline in economic growth during the quarter. However, it would appear to reflect a situation in which businesses are becoming progressively more pessimistic about the outlook for the economy and accordingly are continuing to batten down the hatches and build up the strength of their balance sheets to withstand the onset of adverse economic conditions.”
“The measurement of the Q1 2014 Experian BDI relates to the situation prior to the election and therefore will have encompassed an environment of uncertainty. The reduction in outstanding debts is probably also a function of more aggressive efforts by the credit managers to recover debts owed.”
“The investment necessary to grow businesses at a faster pace is being held back to a minimum. One might hope that the completion of the general election peacefully and successfully may engender an improvement in the investment environment,” Beetar said.
Mining strike resolution is vital for maintaining business financial health
The implication of the improvement in the Experian BDI is that there are at least some forces in the economy working against an unduly sharp downturn in economic activity. One of these is that businesses appear to be in a very sound financial position to survive the ravages of lower economic growth.
Nonetheless, resolution of the mining strike and the associated potential improvement in economic growth is essential to sustain the momentum of balance sheet consolidation in the business sector.
The Experian BDI, published on a quarterly basis, 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 provides clients with meaningful insight into the South African economic climate, supporting them in their development of business strategies.
· The BDI constitutes of three main sections: the Business Debt Stress Index, a macro-economic overview and a sectoral debt analysis;
· The Index provides a concise international and domestic macro-economic overview, highlighting selected indicators, and a forecast of key variables of the South African economy and its nine major sectors (namely agriculture, mining, manufacturing, electricity, construction, trade, transport, finance and services);
· A more detailed analysis of the debt situation in each sector (with regard to debtors’ days, the age categories of debt, judgments and liquidations) are also included in 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;
· 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.
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