The easing of lockdown restrictions helped ease the pace of decline in businesses’ health, according to new insight from Experian South Africa.
Experian’s quarterly Business Debt Index (BDI) for quarter four (Q4) 2020 reflects the level of health of businesses in the economy, which has continued to improve as restrictions ease. As predicted, the BDI improved for a second consecutive quarter in Q4 of 2020, to -0.864, from -1.401 in Q3 and a heavy depressed -3.727 in Q2.
Jaco van Jaarsveldt, Chief Decision Analytics Officer at Experian Africa says the economy was already in recession before the onset of the Covid-19 crisis. This is reflected in the negative readings for the second half of 2019 and Q1 of 2020.
Van Jaarsveldt says: “The extraordinarily stringent lockdown of the economy between late March and May 2020, caused virtually half of the economy to shut down at the time. Given this, it is not surprising that the BDI collapsed in Q2 of 2020 to -3.727, its lowest level ever. The significant improvement in Q3, albeit still with a substantially negative reading, reflected a relative reduction in business debt stress during that quarter. What the further upward trend in Q4 signifies is a marginal improvement from the earlier all-time low in business debt conditions following a lifting of still more restrictions.”
Macroeconomic factors influencing Q4 2020
South Africa’s Q4 GDP exceeded expectations, recording quarter-on-quarter annualised growth of 6,3%, on top of the extraordinarily steep recovery growth rate of 67,3% in Q3. Contributing to the better-than-expected Q4 growth rate domestically was the further lifting of local lockdown restrictions and a better-than-expected global economic outcome.
Van Jaarsveldt says: “Firstly, South Africa’s manufacturing exports benefitted from strong demand for metals and minerals which resulted in a rising trend in the dollar prices of these commodities, enhancing South Africa’s trade performance.
“Secondly, the earlier-than-anticipated announcement of the development of vaccines to fight the Covid-19 virus surprised businesses and brought the timeframe for a return to more normal economic activity globally forward. Finally, the election of Joe Biden as president of the US encouraged the belief that the US government would embark upon additional fiscal stimulus to replace the stimulus that had been introduced at the beginning of the Covid-19 crisis almost a year ago and which was about to lapse.”
These developments resulted in the Q4 BDI coming in significantly stronger than had been anticipated.
There was an additional positive macroeconomic input, namely the sharp rise of the South African Producer Price Index (PPI) relative to the Consumer Price Index (CPI) in Q4. The differential between the two narrowed to -0.27%, from -0.82% in Q3, signifying a marked improvement in perceived profit margins of businesses.
Business debt metrics in Q4 2020
The improvement in business debt conditions in all sectors, except for mining, reflects the positive impact of the lifting of further lockdown restrictions that had knock-on effects in most areas of economic activity.
Notwithstanding the improvement in the BDIs of most sectors, it was only the agricultural sector that recorded a positive BDI in Q4, in the same way as it had done in Q3. This is a direct reflection of the fact that the agricultural sector was the only one in the entire economy that recorded positive GDP growth through 2020. At no stage was there a ban on sales of food during the Covid-19 crisis. Furthermore, climatic conditions were very favourable for substantial crops in most areas of agriculture in South Africa in 2020. This stands to continue into 2021 following widespread rains during the summer rainfall season just passed.
However, the relative improvement in business debt conditions experienced in Q4 was weighted towards larger businesses rather than smaller ones, with SMEs experiencing a relative deterioration in performance in Q4.
Optimistic outlook
Domestically, there is likely to be additional stimulus for growth derived from the substantial relaxation of lockdown restrictions introduced on 1 February 2021 by the Government in response to a fairly dramatic fallback in the rate of COVID-19 infections.
“Even so, it is important to reflect on the fact that, with the BDI still below the zero-level, the level of business debt conditions is still deteriorating at a reasonably brisk pace, even if this is vastly less pronounced than it was a few months ago,” says van Jaarsveldt.