Business insolvencies in South Africa are expected to increase by 2% in 2019, having already seen a 3% increase in 2018.
This is according to a forecast by Euler Hernes, which factors in the level of GDP growth, which is expected to stay well below the desired levels at +1% in 2019 after +0.7% in 2018; and the business environment, which remains clouded by ongoing structural rigidities.
External debt is now increasing (52% of GDP in 2018) and despite accumulation of FX reserves, some external liquidity indicators remain weak. The debt due ascended to 87% of FX reserves, as corporates (particularly state-owned ones) accumulated more USD debt, as a consequence of high debt costs in ZAR.
explains Maxime Lemerle, head of sector and insolvency research at Euler Hermes, explains: “The South African business environment is clouded by ongoing structural rigidities, including uneasy labor relations and periodic disruptions to power supplies, and is compounded by at least four other factors: weak international commodity prices; slowdown in China, the country’s largest trading partner; drought conditions, with weakened agricultural output and a need to import maize and other foodstuffs; and uncertainties relating to US monetary policy tightening.
“The GDP growth will stay well below necessary levels in 2019 (1%, after 0,7% in 2018,” Lemerle adds.
“The ongoing deterioration of the business climate is also witnessed by the World Bank Doing Business 2019 survey which ranks South Africa 82 out of 190 economies (74th three years ago), just below Panama, Tunisia and Bhutan.
“South Africa still keeps some aspects of an Advanced Economy, particularly on protection of minority investors (23rd) and paying taxes (46th) items. However, recurrent power blackouts, difficulties to start a business (134th) and strong barriers to trade (143rd) are key bottlenecks. Barriers to domestic transactions and to register a property (106th) are among other key weaknesses.”
South Africa’s increase is in line with global insolvencies, which confirmed their upward trend from 2017 after seven consecutive years of sizable declines. Euler Herme’s Global Insolvency Index, which covers 43 countries totaling 83% of global GDP, is to post a 10% year-on-year increase for 2018. Overall, the organisation expects 20 countries of our sample to see in 2018 more insolvencies than in 2017.
Three factors explain this outcome:
* A weaker macroeconomic context for some countries;
* The implementation of new types of insolvency procedures and the cleaning of business registers through the official insolvency procedures in a few other countries; and
* More significantly, the stronger willingness to use the insolvency framework in China.
Euler Herme’s view is that the upside trend in insolvencies will continue in 2019 (6% year on year). However, this outlook will reflect a universal reason: the soft landing of the global economy to a slower pace of growth at 3% in 2019 from 3,1% in 2018 and 3,2% in 2017. It expects real GDP growth to soften in the US (from 2,9% in 2018 to 2,5% in 2019), the Eurozone (from 1,9% to 1,6%) and Asia (from 5,1% to 4,8%).
This lowering demand is increasing the vulnerability of companies with high-fixed costs and firms with larger inventories or issues in their working capital requirements. At the same time, the end of easy financing is increasing the vulnerability of debt intensive sectors and more globally, the vulnerability of the most indebted companies.
In fact, most economies, notably the developed ones, are expected to revert to and even cross their respective tempo of GDP growth, which has historically proved to be necessary to stabilize the level of insolvencies (1,7% for Western Europe).