SA Business Debt stress continues to increase in Q3 2014

BY ZIMKHITA MAFANYA - DECEMBER 1, 2014

Despite a number of conflicting trends the Business Debt Index remains in positive territory

The Experian Business Debt Index (BDI) for Q3, has revealed a significant decline to a level of 0.31, from levels of 0.64 and 0.46 in the first two quarters respectively.

“The decline in the BDI in Q3 was anticipated due to the delayed impact of the disruption to business activity and overall economic growth brought about by heavy strikes in the platinum mining and metal industries in the first seven months of 2014,” says Michelle Beetar, Managing Director of Experian SA.

Despite the adverse impact of the strikes however, the BDI still remained in positive territory, reflecting a number of conflicting trends influencing the measurement of debt strain amongst businesses.

The adverse effect of the strikes earlier this year did indeed begin impacting negatively on the ability of businesses to cope financially, reflected in the average number of debtor’s days. Having fallen consistently for the better part of five years after reaching a peak at 64 days in July 2008, it reached a low of 45.5 days in Q3 of 2013. It now stands at a 27-month high of 51.3 days in Q3 of 2014.

Two additional factors which have contributed to the deterioration of financial conditions among businesses are the contracted rate at which producer prices rose in comparison to consumer prices as well as rising domestic short-term interest rates relative to declining longer term interest rates. This is indicative of diminishing pricing power within the business sector.

“The difficult economic environment has led to businesses finding it increasingly difficult to pass on cost increases as a means to recoup profitability,” Beetar explains. “Businesses are progressively seeing their debt servicing costs rising, but are not being able to pass this on to customers.”

A positive has been the slight improvement in economic growth both locally, and in the US. Continued growth over the next few quarters, could result in a marginal improvement in the BDI over the next few quarters. However, there has been a growing divergence between the performance of the world’s largest economy and those of other advanced economies, and some emerging markets. The slowdown in the Eurozone, Japan and China and its impact on global and domestic economic growth may be greater than previously anticipated.

“The fact remains that businesses have been trying to ensure their survival in a low growth environment by building up cash reserves and refraining from investment other than that which is absolutely critical. This has helped them to bide their time and continue to operate as normal for as long as possible, but there are undoubted signs that some of them are beginning to wilt under the strain of low levels of economic activity,” says Beetar.

Pick-up in the global economy will undoubtedly impact the outlook for the BDI in Q4. However, the escalating power supply crisis could damage economic activity. Coupled with the ongoing effects of the economic recession, and the threat of more strikes, these present three major risks.

The inability of the global economy to extricate itself from the aftermath of the 2008/09 economic recession continues to linger. In South Africa these concerns are driving commodity prices down and affecting the country’s export potential.

The threat of another strike – this time by public servants – could not only damage the economy but lead to another credit rating downgrade, and affect economic growth.

“The decline in the BDI was to be expected and understandable. As of now, the financial health of the business sector remains stable and looks as if it could improve further if domestic and global economic conditions improve next year,” Beetar concludes.