The Experian Business Debt Index (BDI), which reflects the relative ability for business to pay their outstanding suppliers and creditors, reveals deteriorating business debt conditions in South Africa.
The Index, a reflection of the overall health of businesses in the economy, improved marginally in Q2 compared with Q1, to -0.388 from -0.419, but still reflects tough times for businesses: when historical revisions are included, the Q1 BDI reflects the weakest business debt conditions since the global financial recession in 2009.
Despite the small improvement in Q2 2019, these readings still reflect a significant worsening of the financial position of companies in South Africa in relation to conditions which had prevailed in recent years.
|Q2 2018||Q3 2018||Q4 2018||Q1 2019||Q2 2019|
|Index>0= Improving business conditions<0 = Deteriorating business conditions||-0.018*||0.228*||-0.099*||-0.419*||-0.388|
“The impact of poor domestic economic conditions on the financial state of companies has been further exacerbated by growing signs of a slowdown in the global economy as well,” said Thabo Hermanus, chief operating officer at Experian South Africa.
GDP lower than expected as a result of load-shedding
In the wake of the historical revisions, the BDI has fallen into significantly negative territory in Q1 and Q2 2019. The main deterioration of inputs relates to South African Q1 GDP. The Q1 GDP quarter-on-quarter annualised growth rate of -3.2% turned out to be considerably worse than all consensus forecasts. Expectations of stronger GDP growth in Q2 2019 (based on early high frequency data) contributed to an improved BDI in the latest release.
The relative improvement in the Q2 BDI was however slightly hampered by US GDP which fell back in Q2 to 2.1% on a quarter-on-quarter annualised basis from 3.1% in Q1. Additionally, the differential between the producer price index (PPI) and the consumer price index (CPI) inflation rates increased in Q2, suggesting a squeeze on corporate profit margins. Long-term interest rates also fell quite sharply relative to short-term interest rates, indicative of an increasingly gloomy view of longer-term economic growth conditions.
Debt age ratio
The outstanding debtors’ days in the 30:60 days ratio increased to 33.49% in Q2 from 29.03% in Q1. The deterioration in the 60:90 day ratio was less marked, rising to 11.76% in Q2 from 11.33% in Q1.
While the overall number of outstanding debtors’ days improved slightly from 56.7 to 54.6 in Q2 2019, the age profile of these debtors’ days worsened, with the ratio of outstanding debt owed of 30 to 60 days relative to that owed of less than 30 days increased further to 33.49% in Q2 from 29.03% in Q1.
Hermanus says, “It is apparent that the cumulative effect of weak economic activity extending over several years now, with economic growth less than 1.5% per annum in each of the past four years, has finally begun to compel businesses to hold back from meeting their debt commitments for as long as possible in order to survive.”
Agriculture improves, but construction, mining and transport deteriorates significantly
Analysis of the BDI by sector displays considerable variance from sector to sector. The most dramatic improvement was recorded in Q2 by the agriculture sector, in line with a normalisation of domestic agricultural conditions following the severe droughts in the north-eastern regions in 2015/16 and that of the Western Cape in 2017/18. The BDI for agriculture shot up from a heavily negative -0.456 in Q1, to a positive 0.236 in Q2.
On the other hand, severe deterioration in conditions was reported in the construction sector, where the BDI fell from an already significantly negative -0.381 in Q1, to -1.280 in Q2. There was also a significant further deterioration in business debt conditions in mining and transport, with both sectors affected negatively by industrial action.
Small Businesses are battling to survive
Whilst the overall debt situation amongst businesses might not have been favourable in the first half of 2019, that of SMEs posted a significant further deterioration. Whereas the total number of outstanding debtors’ days decreased slightly in Q2, to 54.6, from 56.7 in Q1, it worsened in the case of small businesses with SME outstanding debtors’ days rising to a record 66.4 in Q2, from 65.5 in Q1 and levels of below 60 a year ago.
“SMEs are struggling to sustain cash flows with which to survive in the face of tardiness on the part of their bigger counterparts to pay them for work done. It would seem that the brunt of the impact of the weakness of domestic economic conditions has been borne by small businesses, with many of these being forced to close down after struggling to remain in operation for as long as possible,” said Hermanus.
The slump in economic conditions in South Africa experienced since 2014 represents the longest sustained period of economic weakness in almost a century. Per capita GDP growth will have been negative on average for four consecutive years.
“Although the slump in economic growth has not taken the economy into a deep recession, it has been sufficient in its duration to impact the ability of businesses, especially smaller ones, to survive,” says Hermanus.