The Experian Business Debt Index (BDI) improved moderately in Q3 from Q2, rising to a reading of -0.18, from -0.35 in Q2.
The fact that the index remained below the zero-defining line between improvement and deterioration of business debt conditions, implies that the index continued to deteriorate in Q3, but more modestly than in the preceding quarter and – for that matter – in the quarter before this as well (Q1).
The index reflects the relative ability for businesses to pay their outstanding suppliers/creditors as well as the overall health of businesses in the economy.
The improvement is attributable largely to businesses’ willingness to repay creditors, which outweighed the slight deterioration in the macroeconomic contributors.
“While this is a step in the right direction ahead of the festive season, businesses still find themselves in negative territory, albeit a slower deterioration in business debt conditions,” says Thabo Hermanus, chief operations officer at Experian South Africa.
There was a drastic reduction in the ratio of outstanding debtors’ days of 30-to-60 days relative to those of less than 30 days from 34,1% in Q2, which itself had jumped from 29,1% in Q1, to just 26,8% in Q3.
This is the lowest such ratio in a year. As for the ratio of debt owed for 60-to-90 days to outstanding debt of less than 30 days, the ratio plummeted to just 6,9% in Q3, from 11,9% in Q2 and 11,4% in Q1. In fact, the 6,9% value for this ratio in Q3 was the lowest since the end of 2017.
Hermanus says: “Incorporating historical revisions meant that the Q1 BDI reflected 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.”
Given the end of load-shedding in Q2 compared with Q1, several of those sectors which were severely negatively impacted upon by load-shedding, are precisely the ones which have led the way towards a recovery in the BDI in Q3. These include mining, construction and electricity.
There have been only minor shifts in the BDIs for agriculture, services, finance and trade, mostly in a downward direction, but only to a minor extent relative to the improvements in the more electricity-intensive and infrastructural-intensive sectors.
Marked deteriorations were recorded in the manufacturing and transport sectors, which is in line with the disappointing Q3 GDP results of these sectors.
One of the more dramatic inferences to draw from the latest Experian data is the deterioration in the financial position of SMEs relative to the overall business sector.
Whereas the number of outstanding debtors’ days amongst SMEs has shot up from 50.0 at the beginning of 2018, to 65.5 in Q1, 66.1 in Q2 and 68.6 in Q3 of this year, the corresponding increases in outstanding debtors’ days amongst all companies in South Africa has been from 49.0 to 54.7 days over the same period, and is therefore much less pronounced.
This suggests that the weak state of overall economic activity is impacting far more negatively on small businesses than on the overall business sector.
Hermanus comments: “It is encouraging to see the BDI deterioration somewhat easing from positions seen in Q1 2019, but unfortunately we do not foresee this improvement being sustained.
“Based on forecasts of GDP growth domestically and internationally, as well as trends in inflation and interest rates over the next six months, the forecast for the BDI in Q4 is that it will decline, before recovering in Q1 2020.
“In essence, we do not foresee any major recovery in business debt conditions any time soon,” he adds.
“Overall economic growth remains under pressure domestically, especially following the recent bout of extreme load shedding which has swept across South Africa, whilst internationally, growth prospects have also diminished in the face of increased trade tensions between the US and China.
“Domestically, there appear to be huge fiscal constraints building up in the face of the government’s need to bail out state-owned enterprises, most importantly Eskom. This is contributing towards raising government expenditure way beyond what was originally planned.
“The President’s initiative to convene an Investment Summit each year to try and assist in promoting capital investment, appeared to be bearing some fruit,” Hermanus adds. “However, there is little doubt that the recent SAA, Eskom and PRASA debacles will deflate that positive sentiment.”