Cape Town – Business debt conditions in the second quarter of 2017 have continued to deteriorate in South Africa – albeit at a marginally slower pace than the first quarter.
According to the latest Experian Business Debt Index (BDI), debtors days went down from 48.8 in the first quarter to 48 in the second quarter and the score rose slightly in the second quarter to -0.22 from a revised reading of -0.32 for the first quarter.
The Business Debt Index is constructed around a mean value of zero. Values above zero indicate less business debt stress and values below zero indicate increased business debt stress. Higher interest rates for example result in higher borrowing costs and an increase in business stress. Relatively higher production costs in relation to consumer costs decrease the operating margins of businesses, while higher domestic and international growth could result in a better trading environment for businesses.
The slight improvement in the second quarter score is attributed to the first quarter index score being revised down sharply as GDP growth in the first quarter came in weaker than forecast, says Simon Russell, Managing Director of Experian South Africa.
This was on the back of expectations that the GDP in the first quarter of this year would be better than in the fourth quarter of 2016.
“Optimism of a slight recovery at the beginning of the year appeared valid for a variety of reasons,” says Russell. “These included good summer rainfall for improved agricultural production, stronger mining output – which was significantly improved in the first three months of the year compared to 2016 – and the potential boost to consumers’ disposable income from lower inflation, stabilised exchange rates and unchanged interest rates.”
He notes, however, that the weaker GDP recorded in the first quarter of this year, coupled with the contraction in growth for two successive quarters leading to technical recession, resulted in a far worse outcome for the Business Debt Index than hoped for.
“As the anticipated growth did not materialise, the index was revised substantially to -0.32 for the first quarter of 2017 from -0.08 published, the lowest value since the financial crisis” says Russell.
However, leading data for South Africa’s main economic sectors in the second quarter of 2017 have been more positive and endorse the view that GDP in the second quarter will reflect a recovery into positive territory.
The slight improvement in the readings for the second quarter can be attributed to a substantial improvement in the US economy, which has recorded growth of 2.6% in the second quarter of this year – up from the 1.2% downwardly revised figure for the first quarter as well as lower inflation, a stronger currency and unchanged interest rates, says Russell.
“Yet, structural issues facing the South African economy remain burdensome, such as continued low business confidence, a difficult operating environment, volatile policy-making and an uncertain economic outlook. All these things are weighing on businesses.”
Russell notes that the credit rating downgrades which took place in April, have played a strong role in depressing business confidence. Without the capacity to borrow, government spending will falter in line with the stimulatory effects on the economy such spending used to have.
“Although the economy remains relatively weak and the second quarter figures of the index are in negative territory, businesses are maintaining a fairly stable financial position with many continuing to undertake a good measure of precaution in their decision-making and day-to-day activities,” says Russell.
Debtors’ days reflect resilience
The fact that the average number of debtors’ days outstanding decreased to 48.0, from 48.8 in the first quarter suggests that businesses remain resilient from a financial strain point-of-view in spite of the weakness of the economy.
The ratio of outstanding debtors’ days in excess of 90 days relative to those outstanding for less than 60 days, remained almost unchanged at 10.3 from 10.2 in the first quarter.
“Again, there was no great deterioration in the ability of businesses to meet their debt servicing commitments,” Russell points out.
The short-term economic outlook is being bolstered by a relatively strong currency, which is driving down forecasts of inflation further.
This increases the possibility of further interest rate cuts later in the year. There has also been an improvement in manufacturing output and retail sales.
These suggest that the Business Debt Index for the third and fourth quarters should reflect further marginal improvements, says Russell.
“Operating in a recessionary environment, businesses have little option but to adopt a very conservative approach to managing their finances and reducing risk to help insulate themselves from the impact of sustained slow growth and ensure their resilience.”
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