Experian and Econometrix launches first ever Business Debt Index
The Index shows that debt stress amongst businesses continues to fall
South Africa, 12 February 2014 – Experian SA and Econometrix today launched South Africa’s first ever Business Debt Index (BDI), a vital and unprecedented 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,” said Michelle Beetar, Managing Director at 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 -2.0% 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,” said 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 -27.0% 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,” said 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,” said 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 ongoing "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 said.
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.
Llinked 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.
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.
Experian South Africa (Pty) Ltd
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Experian is the leading global information services company, providing data and analytical tools to clients around the world. The Group helps businesses to manage credit risk, prevent fraud, target marketing offers and automate decision making. Experian also helps individuals to check their credit report and credit score, and protect against identity theft.
Experian plc is listed on the London Stock Exchange (EXPN) and is a constituent of the FTSE 100 index. Total revenue for the year ended 31 March 2013 was US$4.7 billion. Experian employs approximately 17,000 people in 40 countries and has its corporate headquarters in Dublin, Ireland, with operational headquarters in Nottingham, UK; California, US; and São Paulo, Brazil.
For more information, visit http://www.experianplc.com.