Cape Town - Businesses are experiencing high levels of debt stress as the economy keeps sailing close to recessionary conditions, according to the Experian Business Debt Index (BDI).
The BDI for the first quarter of 2016 showed business debt health improved slightly. However, it is still close to the zero level, which distinguishes between improvement and deterioration in business debt conditions.
The average number of outstanding debtors' days in the first quarter of 2016 rose again – from 50.4 in the final quarter of last year to 52.4 days, pushing them to the highest number since Q3 2010.
Similarly, the ratio of debts owed for more than 90 days relative to debts owed for less than 60 days rose dramatically to 14.3 in Q1 2016 from 11.1 and 12.1 in Q3 and Q4 of 2015 respectively – the highest ratio since the global financial recession in Q1 of 2009.
“The fact that the number of outstanding debtors’ days is gradually increasing, albeit by marginal amounts, is concerning as they are indicative of businesses struggling to pay their debts, similar to circumstances observed before the 2008/09 global financial crisis,” said Experian South Africa managing director Michelle Beetar.
Data showed the agriculture sector is still struggling from the crippling effect of the drought. The BDI for the construction, services and electricity sectors also placed them in negative territory, as they continued to experience deteriorating business conditions.
However, transport and communication, mining, finance and business services, wholesale and retail trade, and manufacturing showed an improvement in business debt conditions, compared to the last quarter when eight of the nine sectors deteriorated.
While the majority of business balance sheets remain relatively healthy, there is evidence suggesting that more businesses are under acute strain in the current environment of low growth and rising interest rates.
“Although businesses are experiencing increasing levels of debt stress, the economy is not collapsing,” said Beetar.
“We have seen producer prices accelerate relative to that of consumer prices, while marginal growth was observed in the first quarter. This implies that many manufacturers have been trying to claw back margins following the precipitous depreciation of the rand last year by raising their prices faster than before.”
Long-term interest rates remain significantly higher than short-term interest rates – another optimistic sign that enduring economic growth prospects remain more upbeat than those in the shorter term, although the gap between the two narrowed slightly in this past quarter.
Domestic interest rates have also risen relative to foreign interest rates, which should assist in attracting foreign capital into South Africa, helping to stabilise the rand and minimise the need for a continued rise in interest rates, Experian’s analysts maintain.
According to the BDI, the fact that the economy has not been collapsing can to a great extent be ascribed to businesses building up substantial cash reserves instead of spending heavily on capital projects, insulating them against sustained slow growth.
The BDI shows that while the economy keeps sailing close to recessionary conditions, there is potential for some partially positive movement.
“Businesses would be advised to remain cautious as the economy is not out of the woods yet. That being said, however, there is hope for positive or at least horizontal movement in the coming quarter,” noted Beetar.
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