Debt stress continues to increase for a third consecutive quarter
After improving progressively through the course of 2013, to a peak of 0.65 in Q1 of 2014, the Experian Business Debt Index (BDI) has declined for three successive quarters. The latest BDI for Q4 of 2014 declined to 0.20, from 0.35 in the previous quarter.
Despite this decline, the BDI still remains above zero which implies that business debt conditions are still holding up despite the marked slowdown in the rate at which financial health might be improving.
“Given the continued slow-down in the GDP growth rate of the economy over the past three years, from 3.2% in 2011 down to 2.2% in each of 2012 and 2013 and down further to a projected 1.4% for 2014, a slow-down in the rate at which business debt conditions are improving, is totally understandable,” says Michelle Beetar, Managing Director of Experian South Africa.
Michelle Beetar, Managing Director of Experian South Africa.
The latest analysis suggests that the reasons for which business debt conditions are holding up appear to be precisely the same reasons as to why the economy's long-term sustainable growth rate has not been picking up.
Businesses act with caution
For a variety of reasons, from concerns regarding the outlook for global economic growth, to disruptions caused by industrial action domestically, to fears about the security of electricity supply, business confidence has deteriorated over the course of 2014.
As a result, there has been a growing reluctance to invest in new ventures, especially in respect of the private sector. In the third quarter of 2014 , fixed capital formation by the private sector was down 6.7% on levels of a year earlier and for the first three quarters of the year growth in fixed capital formation by the private sector was -2.4% on a year-on-year basis.
Instead, it appears as though the corporate sector has progressively built up its cash reserves in order to cope with an environment in which economic growth is expected to be far lower than previously envisaged.
The fact that businesses have been holding onto their cash rather than investing has ensured their survival. However, it has also prevented the type of innovation and investment necessary to uplift the country's sustainable growth rate.
“The proclivity of private sector business to ‘batten down the hatches’ so to speak to ensure survival in a low growth environment is reflected in the progressive decline in the average number of debtors’ days between 2009 and 2013,” Beetar explains.
Thereafter, the length of the average debtors’ days’ book began rising back, reaching 51.5 days in Q3 of 2014. This represents the extent to which overall business conditions slowed from Q4 of 2013 onwards. Especially in the second and third quarters of 2014, the impacts of strikes in the mining and manufacturing sectors (which began in January 2014) appear to have had some impact in eroding the financial health of businesses.
Fortunately, Q4 of 2014 saw the number of average debtors’ days dropping back to 49.3, in line with a general improvement in overall business conditions after the strikes had ended.
Nonetheless, even though GDP growth might have improved and debtors’ days fallen in Q4 of 2014, the impact of the disruptions caused by strikes earlier in the year, impacted upon business debt conditions with a lag. It is this which appears to account for the reduction in the overall BDI in Q4 of 2014.
BDI looks at key economic sectors
For the first time, the BDI also revealed data specifically for the nine major sectors of the economy. The agricultural, services, transport, construction, finance and trade sectors posted some decline in Q4 despite holding up earlier in 2014.
“Companies in the wholesale and retail trade sector posted the biggest relative deterioration in business health, having their margins severely squeezed on the back of declining growth in consumer spending,” Beetar explains.
Conversely, those sectors which had suffered considerable declines in production earlier in the year as a result of strikes, most notably mining and manufacturing and the electricity-related businesses supplying these sectors, posted fairly substantial improvements in their BDI measures in Q4 2014.
Outlook for 2015
The financial health of businesses should be improved by the expected mild upturn in overall economic growth to over 2% in 2015. The 30% decline in fuel prices should provide some extra financial maneuverability for many businesses as well as for overall consumer demand.
However, concerns about industrial action and electricity supply have not dissipated. Thus, although there might be a modest improvement in business conditions, capital formation is more than likely to remain slack. “This would result in business debt conditions improving somewhat in the first quarter of this year”, Beetar concludes.
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