The Experian Business Debt Index (BDI) improved marginally in the second quarter compared with Q1 to -0.388 from -0.419, but still reflects an environment of deteriorating in business debt conditions in South Africa.
The index reflects the relative ability for business to pay their outstanding suppliers/creditors – the overall health of businesses in the economy.
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.
“The impact of poor domestic economic conditions on the financial state of companies has been further exacerbated by growing signs of a slowdown in the global economy as well,” said Thabo Hermanus, chief operating officer at Experian South Africa.
GDP lower than expected as a result of load-shedding
In the wake of the historical revisions, the BDI has fallen into significantly negative territory in Q1 and Q2 2019. The main deterioration of inputs relates to the country’s Q1 GDP, Experian said.
The Q1 GDP quarter-on-quarter annualised growth rate of -3.2% turned out to be considerably worse than all consensus forecasts. Expectations of stronger GDP growth in Q2 2019 contributed to an improved BDI in the latest release, the consumer credit reporting said.
The relative improvement in the Q2 BDI was however slightly hampered by US GDP which fell back in Q2 to 2.1% on a quarter-on-quarter annualised basis from 3.1% in Q1.
Additionally, the differential between the producer price index (PPI) and the consumer price index (CPI) inflation rates increased in Q2, suggesting a squeeze on corporate profit margins.
“Long-term interest rates also fell quite sharply relative to short-term interest rates, indicative of an increasingly gloomy view of longer-term economic growth conditions,” Experian said.
Debt age ratio
The outstanding debtors’ days in the 30:60 days ratio increased to 33.49% in Q2 from 29.03% in Q1. The deterioration in the 60:90 day ratio was less marked, rising to 11.76% in Q2 from 11.33% in Q1, the index found.
While the overall number of outstanding debtors’ days improved slightly from 56.7 to 54.6 in Q2 2019, the age profile of these debtors’ days worsened, with the ratio of outstanding debt owed of 30 to 60 days relative to that owed of less than 30 days increased further to 33.49% in Q2 from 29.03% in Q1.
“It is apparent that the cumulative effect of weak economic activity extending over several years now, with economic growth less than 1.5% per annum in each of the past four years, has finally begun to compel businesses to hold back from meeting their debt commitments for as long as possible in order to survive,” Hermanus said.
Small Businesses are battling to survive
Whilst the overall debt situation amongst businesses might not have been favourable in the first half of 2019, that of SMEs posted a significant further deterioration.
Whereas the total number of outstanding debtors’ days decreased slightly in Q2, to 54.6, from 56.7 in Q1, it worsened in the case of small businesses with SME outstanding debtors’ days rising to a record 66.4 in Q2, from 65.5 in Q1 and levels of below 60 a year ago.
“SMEs are struggling to sustain cash flows with which to survive in the face of tardiness on the part of their bigger counterparts to pay them for work done.
“It would seem that the brunt of the impact of the weakness of domestic economic conditions has been borne by small businesses, with many of these being forced to close down after struggling to remain in operation for as long as possible,” said Hermanus.
The slump in economic conditions in South Africa experienced since 2014 represents the longest sustained period of economic weakness in almost a century. Per capita GDP growth will have been negative on average for four consecutive years, Experian pointed out.
“Although the slump in economic growth has not taken the economy into deep recession, it has been sufficient in its duration to impact the ability of businesses, especially smaller ones, to survive,” Hermanus said.