Business debt stress conditions in South Africa continued to improve in Q1 2018 with the latest Experian Business Debt Index (BDI) reading of 0.360. This represented a slowdown in the rate of improvement in business debt conditions, from the previous quarter’s 0.430, but remains substantially elevated against recent historical values.

“Although the first quarter Experian BDI’s reading is slightly lower than the fourth quarter, the BDI, as it stands, is the second-best reading in four years. It continues to be supported by improved macroeconomic conditions made possible by a marked turnaround in economic growth in South Africa and abroad,” says David Coleman, chief data officer at Experian SA.

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. 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.

The first quarter BDI for 2018 also benefited from the sharply lower producer price index (producer inflation rate) which came in below the consumer price index (consumer inflation rate), thus allowing for improved business margins that could benefit from the rate of increases with their cost structures tracking lower.

“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,” says Coleman.

BDI by sector

From a sectoral perspective, sharp declines in the BDI for agriculture and mining contributed to the deterioration in the overall BDI. This fallback is largely a process of normalisation following the previous quarters where both sectors showed a pronounced recovery.

The debt profile in the agriculture sector worsened due to the drought in the Western Cape, which has resulted in financial strain amongst farming communities, exacerbating difficulties by the agricultural sector in meeting loan repayments. There was also a decline in the BDI for mining, which was largely statistical, coming off a high base from the previous quarter.

Outlook

While the sharp improvement in business confidence in the first three months of 2018 strongly suggest an improved BDI in the next quarter, it is likely that this will not occur. The upward revisions to economic growth in the second half of 2017 would see growth moderating in the initial quarters of 2018. This, together with the fall in United States economic growth as well as data on South Africa’s main economic sectors of mining, manufacturing and electricity production, retail and wholesale trade sales point to the likelihood that economic growth in South Africa will normalise during 2018.

“Furthermore, 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. In line with this concept, the BDI will see a slight further slowdown in improved BDI for the next quarters,” says Coleman. As such, the BDI is expected to show a sideways movement in the next quarter before declining as the economy stabilises.

The moderate outlook in the next quarter is likely to be in line with the renewed weakness in the Rand with potential inflationary pressures which will be exacerbated by the increase in the rate of VAT and sharp escalation of world oil prices, which will hamper global economic growth. –Press release