- The quarterly Business Default Index (BDI) is produced by Exparian Africa.
- Overall debtors' days outstanding fell from a decade-long high of 64.5 days in Q2 to just 55.2 days in Q3.
- The index reflects that South African businesses benefited from the 30% effective reduction in their debt servicing costs.
The Covid-19 pandemic and its impact on economic activity in South Africa as a result of related lockdowns, played a significant role in bringing about a deterioration in the quarterly Business Default Index (BDI), produced by Exparian Africa.
The latest index, released earlier this week, showed that by the third quarter of this year there was far more business activity than in the second quarter. Experian regards the BDI as reflecting the level of health of businesses in the economy.
Overall debtors' days outstanding fell dramatically from a decade-long high of 64.5 days in Q2 and 59.8 days in Q1, to just 55.2 days in Q3. Similarly, the ratio of the longer-term outstanding debt to the shorter-term debt narrowed dramatically from a record 12.1% in Q2 and 9.3% in Q1, to 7.5% in Q3.
The index reflects that South African businesses benefited from the 30% effective reduction in their debt servicing costs as a result of the cut in the prime overdraft rate from 10% at the beginning of the year, to 7% in July. In addition, from the fiscal side, many of those businesses and consumers who were retrenched or received pay cuts during the strictest phase of lockdown benefited from the Temporary Employee Relief Scheme (TERS) executed by the Unemployment Insurance Fund and introduced by the government to provide some temporary financial relief.
Banks were also encouraged to provide temporary interest payment holidays for holders of mortgage advances, car loans and other relevant forms of debt.
"During the second quarter, both international and domestic economies were heavily locked down in an effort to quell the spread of Covid-19. This meant that many sectors saw activity declining by between 50% and 100% through the course of April specifically. From May onwards, some of the lockdown restrictions gradually came to be lifted, which benefitted Q3 greatly," said Jaco van Jaarsveldt, chief decision analytics officer at Experian Africa.
"Domestically, it has been observed that a variety of economic indicators have progressively improved with the relaxation of lockdown restrictions, as human behaviour and business conditions gradually aspired to return to normality. This was the dominant trend in economic activity and the debt metrics of businesses overall in Q3."
In his view, the best that one can hope for is that the rate of deterioration in business debt conditions in the short to medium term will simply become much more temperate.
"We thus recommend businesses to remain very focused on cash flow management, ensuring stock holding aligns with both capacity restrictions and consumer demand," said Van Jaarsveldt.