Expect more businesses to close in South Africa this year

 ·5 Feb 2020

South African insolvencies are expected to rise in 2020 as the country battles with a protracted growth slowdown, the latest Global Insolvency Report by Euler Hermes shows.

The group said South Africa is experiencing a protracted growth slowdown, with estimates of 0% in 2020 and +0.7% in 2021.

“2021 will mark the fourth consecutive year of below 1% real GDP growth. Domestic demand is unlikely to sustain growth, in a context of a high tax burden, a 30% rate of unemployment as well as downward pressures on wages.

“Low growth has driven deterioration in payment behaviour with business insolvencies up by +6% in 2019 and expected to increase by +4% in 2020,” it said.

On the fiscal side, Euler Hermes said that debt is likely to increase to 62.5% of GDP in 2020 with a current fiscal deficit of -5.9% in 2019, leaving limited room for manoeuvre for more fiscal stimulus.

“Opportunities for the economy could have emerged from the country’s rich assets in commodities but the lack of reforms is most likely to prevent the country from reaping the benefits of exportations in this sector.

“In addition, the lack of investments in structural infrastructural vulnerabilities, especially reflected by long-lasting electricity cuts happening this year, combined with increasing uncertainty on property rights, have led to investments outflows from the country,” it said.

Euler Hermes Insolvency Heat Map 2020

At a global level, the upward trend in business insolvencies continued in 2019 (+9% y/y), mainly due to the prolonged surge in China (+20%) and, to a lesser extent, a trend reversal in Western Europe (+2%) and North America (+3%), the report said.

In 2020, business failures are set to rise for the fourth consecutive year (+6% y/y). The combination of a low-for-longer pace of economic momentum, notably in advanced economies and in the industrial sector, and the lagging effects of trade disputes, political uncertainties and social tensions, will keep companies under pressure, Euler Hermes said.

Insolvencies in 2020 (yearly change in %)

Businesses struggling to stay afloat

Data published by StatsSA at the end of January highlights how difficult it is to be a business owner in South Africa right now.

The data shows that the number of liquidations increased by 10.7% in 2019 compared with 2018. This followed annual changes of -1.2% in 2018 and -3.4% in 2017.

Company liquidations increased by 11% (from 972 to 1,079) and close corporation liquidations increased by 10.3% (from 873 to 963) between 2018 and 2019.

Activity in South Africa’s private sector shrank for the ninth consecutive month in January albeit at a slower pace, as weak demand, lack of investment and load shedding weighed heavily, the latest PMI data from IHS Markit shows.

The Purchasing Managers’ Index (PMI) is an index of the direction of economic trends in the manufacturing and service sector.

IHS Markit’s PMI rose to 48.3 in January from 47.6 in December – remaining below the 50 level that separates expansion from contraction.

“The rate at which output fell was the weakest for three months, albeit still solid overall, Companies cited falling demand, a lack of investment and partial load shedding (power cuts) for the decline in activity,” it said.

Absa’s Purchasing Managers’ Index (PMI) – an index of the direction of economic trends in the manufacturing and service sector – dropped by to 45.2 from 47.1 in December, while sentiment in the manufacturing industry fell to the lowest level in four months in January as weak demand weighed on factory output.

Read: City Power is switching off heavy power users: Here’s how to calculate how much electricity you are using

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