Johannesburg, 3 September 2015 – The latest Experian Business Debt Index (BDI) has revealed that the financial health of South African businesses has fallen to its lowest point since the financial crisis in 2009.
During Q2, the BDI fell to 0.127, compared to 0.237 in the first quarter.
“Although the reading has remained above the 0.0 level - which distinguishes between improving and deteriorating business debt conditions - the reading is the worst since 2009, when the index reached negative levels,” says Michelle Beetar, Managing Director of Experian South Africa. “This indicates that the rate of improvement in business debt conditions has indeed diminished significantly, in line with worsening economic conditions both domestically and abroad.”
For a number of years now, the financial health of businesses has been stable and improving. This is partly due to many businesses recognising the difficult economic circumstances following the global financial crisis and refraining from aggressive capital investment beyond what was absolutely necessary. This had helped ensure stability in balance sheets.
The latest BDI, however, has revealed that the steady overall deterioration of the domestic and international growth environments has impacted the financial health of businesses.
This relative deterioration has gone hand-in-hand with a gradual increase in the number of outstanding debtor days from the 43.6 days for October 2013 to 51.4 days in May 2015. Although June witnessed a countervailing reduction, to 49.2 days, the average number of outstanding debtor days in the second quarter of 2015, of 50.4, was the highest in the past two years.
Similarly, the share of debts outstanding at 30 to 60 days (as a percentage of those outstanding for less than 30 days) rose to 19.7% in the second quarter, up from 16.9% in the first quarter. The number of debts outstanding for more than 90 days relative to those outstanding for less than 60 days increased to 11.6% in the second quarter of 2015, from 11.5% in the first quarter.
The overall macroeconomic environment also deteriorated in the second quarter. Global and domestic economic growth rates declined noticeably in the second quarter, with the domestic economy dipping to 1.6% on a year-on-year basis, from 2.0% in the first quarter.
The tightness of the economic environment was also reflected in the widening disparity between consumer price inflation (CPI) and producer price inflation (PPI). PPI remained considerably lower than CPI, indicating the extent of the pressure on pricing power within weak demand conditions in the economy.
Although there were marginal improvements in some of the sectors, the majority remained in negative territory, recording deteriorating financial health.
The agricultural sector saw a faster deterioration in financial conditions in Q2, due to the intensification of current drought conditions. This had a knock-on effect to the wholesale, retail, accommodation and restaurants sectors. This may have been driven by the sharp falloff in foreign tourism associated with the Ebola scare and the installation of tighter visa requirements. Increased load-shedding and reduced demand for electricity saw this sector also recording a deterioration.
The deteriorating trend of the BDI is expected to continue during the second half of this financial year. Slower Chinese economic growth is impacting the demand for raw materials which has resulted in lower commodity prices, the effects of which are likely to reverberate through the manufacturing sector, and to a lesser extent other sectors of the economy.
“The relative health of the business sector is set to gradually give way to poorer financial conditions on the back of the inability of the global and domestic economies to gain any traction,” concludes Beetar.
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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