South Africa has seen a sharp turnaround in debt, the first positive upturn since Q3 2015.
The Experian Business Debt Index (BDI) went up to 0.443 in Q4 2017 from 0.059 in the previous quarter. As the best reading since 2014, this suggests South African business debt conditions are improving on the back of a gradual turnaround in the local economy and continuously improving growth abroad.

“The latest reading of improved business debt stress levels is encouraging, and indicates that the bleak business conditions experienced since 2014 are reaching a turning point,” says Simon Russell, MD of Experian SA.

The positive BDI outcome has been helped by the better than expected Q3 2017 growth figures. South Africa’s GDP growth forecasts for 2017 and 2018 had been set at 0,7% and 1,1%. These have now been revised upwards to 1% and 1,9% respectively.

Year-on-year growth in the mining sector remained strongly positive, while manufacturing recorded a substantial improvement in Q3 2017.

Agricultural output growth has almost doubled in Q3 2017 following the drought of the preceding two years, and despite the difficult conditions still being experienced in the Western Cape.

Passenger vehicle and retail sales growth have also accelerated towards the end of 2017 as the rand strengthened.

Growth in consumer expenditure was augmented by the better than expected inflation that helped to boost disposable income growth.

Other variables that contributed to the upswing in the BDI were a marginal increase in the PPI inflation rate relative to the CPI, which suggests an increase in business margins.

In the US, interest rates and GDP — two contributing variables in the make-up of the Experian BDI – also experienced revised growth rates and improved business sentiment. This was helped by (among others) the possibility of tax cuts and increased infrastructural investment spending.

The ratio of loans outstanding of 30 to 60 days relative to that of less than 30 days decreased from 17,7% in Q3 2017 to 15,8% in Q4 2017. Aside from Q4 2016, this was the lowest such ratio in a decade. The ratio of debt owed of 60 to 90 days relative to debt owed at less than 60 days remained unchanged at 5,3%, still low by historical standards.

These ratios, along with improved debtors’ days contributed to the positive movement for the BDI in Q4 2017. The average number of outstanding debtors’ days declined further to 46,7, continuing a trend from previous quarters (Q3: 48,7; Q2: 48; and Q1: 47;3).

“The low levels of business confidence in 2017 contributed towards businesses holding off large-scale capital investments and rather building up solid cash flows instead,” explains Russell.

The upward revision of economic growth for Q2 and Q3 continued into the Q4 BDI where eight out of the nine sectors recorded a positive BDI. As expected, mining and agriculture recorded the most positive for business debt conditions.

Although there was a marked improvement in the construction industry, its barely positive BDI indicates that conditions in this sector remain tight due to low levels of infrastructural investments. The BDI for community services was also just in positive territory following the government’s cutbacks in spending as a precaution against further credit rating downgrades.

The share of small and medium-sized enterprises in total debt increased marginally from 21,1% in Q3 2017 to 21,2% in Q4 2017. The ratio of long-term debt to short-term debt (a measure of debt stress) amongst SMEs rose from 7,6 in Q3 to 8.2 in Q4. Despite the small increase, the ratio remains near its lowest level since 2014.

“SMEs that survived the early stages of the economic downturn have succeeded in consolidating their balance sheets to continue operating in the low growth environment. This debt ratio represents these surviving SMEs and reflects a more solid financial state,” says Russell.

Domestic and international changes in the business environment have contributed to a more positive BDI. Nevertheless, structural challenges to higher economic growth remain. These include poor levels of education and little focus on the growth of small businesses within the economy.

“In the short-term, it is worth noting that the recent changes to political leadership, which may influence the economic policy’s direction, has resulted in a significant improvement to business sentiment. This increases the likelihood of a further meaningful and sustained upswing in capital investment in the coming months,” says Russell.

“With corporates using their accumulated savings for investments, there is the risk that poorly made investment decisions may weigh in on their business debt stress levels. As such, we expect the BDI to stabilise in positive territory in the first two quarters of 2018.”