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Business debt stress conditions in South Africa continued to improve in the first quarter of 2018, according to the latest Experian Business Debt Index (BDI).
Although the latest index reading of 0.360 is a slowdown in the rate of improvement in business debt conditions, compared to the previous quarter’s 0.430, it remains "substantially elevated against recent historical values" and is the second best reading in four years, according to Experian.
While the sharp improvement in business confidence in the first three months of 2018 strongly suggests an improved BDI in the next quarter, it is likely this will not occur, according to the outlook provided in the BDI report.
Experian foresees that, if businesses continue to commit funding to their operations in a more conducive growth climate, it is conceivable that they will be more pressed to extend the repayments of their debts. The BDI is, therefore, expected to show a sideways movement in the next quarter before declining as the economy stabilises.
According to the BDI report, the moderate outlook in the next quarter is likely to be in line with the renewed weakness in the rand with potential inflationary pressures. This is expected to be exacerbated by the increase in the rate of VAT and a sharp escalation of world oil prices, which will hamper global economic growth.
David Coleman, chief data officer at Experian SA, said credits improved macroeconomic conditions due to a "turnaround" in economic growth in SA and abroad.
"Economic growth received a boost from the lagged effects of drought conditions coming to an end in the agricultural sector, and the sharp recovery in the mining sector following a dismal 2016," said Coleman.
"The lower-than-anticipated headline inflation rate, on the back of a continued reduction in food inflation, subdued fuel prices and the stronger rand, played a role in assisting the economy, and consequently the BDI’s performance.
"The fall in inflation has also led to lower interest rates, which further improved business debt conditions in Q1 2018."
He said the BDI, for the first quarter of 2018, also benefited from the sharply lower producer price index, which came in below the consumer price index. This allowed for improved business margins.
"All of these factors were further boosted by the improved business confidence that followed from the change in leadership in the country. Optimistically, improved confidence will see businesses commit more working capital. However, this may have the unfortunate consequence of delaying payment of existing debt," cautioned Coleman.
Debt age ratio
The latest BDI shows that a significant contributor to the overall decline was the debt age ratio. This is the ratio of debt owed for between 60 to 90 days relative to debt owed for less than 30 days. This rate increased sharply to 6.8% in the first quarter, from 5.5% in the previous quarter. Despite increasing in the first quarter, the ratio was still lower than the ratios recorded in 2012 and 2015.
There were sharp declines in the BDI for agriculture and mining, largely due to a process of normalisation following the previous quarters, where both sectors showed a pronounced recovery, according to the BDI report.
The debt profile in the agriculture sector worsened due to the drought in the Western Cape, which has resulted in financial strain among farming communities, exacerbating difficulties by the agricultural sector in meeting loan repayments.
The BDI reading improved for community services – primarily composed of government – which is linked to the reduction in time by government department payments for services rendered.
Other services sectors such as finance and retail trade also recorded significant improvements. The increase in the BDI for retail and wholesale trade correlates with the strong performance of retail sales in the fourth quarter of 2017, according to the BDI report.
Construction and transport reflected a continuing deterioration in business debt conditions and reflects the cut back in public sector infrastructure investment.
"The uncertain financial state of state-owned enterprises means a reluctance to extend themselves financially on investment projects," the report states.
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