experianBusiness Debt Index continues to remain above the zero line, indicating a weak but not collapsing economy

The latest Experian Business Debt Index (BDI) posted a slight improvement from 0.144 in quarter two to 0.188 in quarter three, despite weakening economic activity.  This improvement was driven largely by a reduction in outstanding debtor days – the average number of days it takes a company to receive payment from its customers after issuing an invoice to them; or how quickly cash is collected from debtors.

The third quarter this year saw a welcome reduction in debtor days to an average of 48.7, down from 50.3 in the second quarter. The fall comes off a steady increase in debtor days, rising from a low point of 45.4 average debtor days in the third quarter of 2013, to around 50 days in the previous four quarters, indicative of challenging economic times. The ratio of outstanding debts of more than 90 days relative to outstanding debts of less than 60 days also declined from 11.6% to 11% between the second and third quarters. Similarly, the ratio of outstanding debts of between 30 and 60 days to debts owed of less than 30 days, declined from 19.6% in the second quarter, to 16.6% in the third.

“It is possible that expectations around continued low economic growth – with no meaningful recovery over the coming year – may have encouraged businesses to refrain from taking on substantial new investments, opting to hold onto their cash balances,” says Experian SA’s Managing Director, Michelle Beetar.

“Instead, it appears that they were driven to reduce outstanding debts as far as possible. The prospect of an increase in interest rates might also have encouraged businesses to tighten their belts, possibly reflecting in the reduction in debtor days.”

Macroeconomic factors

From a macroeconomic perspective, whilst growth both domestically and abroad slowed slightly year-on-year, some of the negative impact on the BDI was neutralised by a fall in Consumer Price Index (CPI) inflation in the third quarter, which eased some of the erosion of disposable incomes in the economy.  This was further assisted with renewed fuel price reductions, whilst the fall in the value of the Rand may also have provided relief to some export-oriented businesses, particularly in the manufacturing sector.

Sector Analysis

The BDI improved for most sectors, with the exception of agriculture, mining and electricity, in the third quarter.  These sectors also performed weakly in terms of GDP growth: the drought-ridden agricultural sector, mining and electricity registered quarter-on-quarter seasonally adjusted growth rates of -12.6%, -9.8% and -8.0% respectively.

Conversely, the manufacturing and retail sectors recorded significant improvements in growth in the third quarter. This further explains the improvement in the overall debtor days witnessed in the third quarter, considering that these sectors are dominant in terms of the number of companies with outstanding debtors.

Outlook

The third quarter improvement in the BDI shows that whilst the economy remains weak, it is not collapsing. On the contrary, the fact that businesses are not incurring an unduly stretched debtor profile and remain relatively cash flush is helping them withstand the ravages of low revenue growth.  “Nonetheless, based on current economic growth rate trends and macroeconomic indicators, it still appears likely that a further deterioration in the rate of improvement in business debt conditions will occur in coming quarters.   Without the certainty of an improvement in the country’s sustainable growth rate, businesses have little option but to adopt a very conservative approach to managing their finances and to reduce risk taking to a minimum,” Beetar added.

Source: Experian