Contrary to the expectation in the previous quarter that the BDI would probably fall below the zero level in the next period, the BDI edged slightly upwards in Q1 2016.
“Although businesses are experiencing increasing levels of debt stress, the economy is not collapsing,” says Michelle Beetar, Experian South Africa Managing Director. “We have seen producer prices accelerate relative to that of consumer prices, while marginal growth was observed in the first quarter. This implies that many manufacturers have been trying to claw back margins following the precipitous depreciation of the Rand last year by raising their prices faster than before.”
Long-term interest rates remain significantly higher than short-term interest rates – another optimistic sign that enduring economic growth prospects remain more upbeat than those in the shorter-term, although the gap between the two narrowed slightly in this past quarter.
Domestic interest rates have also risen relative to foreign interest rates, which should assist in attracting foreign capital into South Africa, helping to stabilise the Rand and minimise the need for a continued rise in interest rates, Experian’s analysts maintain.
Several crucial factors have impacted the improvement levels:
Despite all these headwinds against economic growth, there have been indications that the economy is not collapsing, even if it is not growing at more than a very pedestrian pace.
Much of the fact that the South African economy has not been collapsing can be ascribed to businesses building up substantial cash reserves instead of spending heavily on capital projects, which are insulating them against the ravages of sustained slow growth.
The average number of outstanding debtors' days in Q1 2016 rose again – from 50.4 in the final quarter of last year to 52.4 days, pushing them to the highest number since Q3 2010.
Similarly, the ratio of debts owed for more than 90 days relative to debts owed for less than 60 days rose dramatically to 14.3 in Q1 2016 from 11.1 and 12.1 in Q3 and Q4 of 2015 respectively – the highest ratio since the global financial recession in Q1 of 2009.
The majority of business balance sheets remain relatively healthy for now despite evidence that more businesses are under acute strain in the current environment of low growth and rising interest rates.
“The fact that the number of outstanding debtors’ days is gradually increasing, albeit by marginal amounts, is concerning as they are indicative of businesses struggling to pay their debts, similar to circumstances observed before the 2008/09 global financial crisis,” says Beetar.
Agriculture struggles while some sectors make a slight recovery
The agricultural sector has deteriorated significantly due to the crippling impact of the drought. The BDI for the construction, services and electricity sectors also placed them in negative territory, as they continued to experience deteriorating business conditions.
However, some sectors – transport and communication, mining, finance and business services, wholesale and retail trade, and manufacturing – showed an improvement in business debt conditions, compared to the last quarter when eight out of the nine sectors deteriorated.
The BDI shows that while the economy keeps sailing close to recessionary conditions, there is potential for some partially positive movement.
“Businesses would be advised to remain cautious as the economy is not out of the woods yet. That being said, however, there is hope for positive or at least horizontal movement in the coming quarter,” adds 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 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
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