The rate at which businesses have been paying off their debts over the last five years has been improving, with local businesses also having improved their balance sheets, despite slow domestic economic growth.

This was revealed earlier this month at the release of global information services company Experian’s latest Business Debt Index (BDI), which had, despite progressive improvement throughout 2013, declined for three successive quarters in 2014.

The BDI had started off at a peak of 0.65 in the first quarter of 2014, but had declined to 0.20 by the last quarter of the year.

Nevertheless, the BDI for the quarter ended December 31, had remained in positive territory, which implied that business debt conditions were still holding up, despite the marked slowdown in the rate at which financial health may be improving, said independent economic consultant Econometrix director and chief economist Dr Azar Jammine.

Experian partnered with Econometrix to interpret the index.

“Given the continued slowdown in the gross domestic product (GDP) growth rate of the economy over the past three years, from 3.2% in 2011 down to 2.2% in each of 2012 and 2013 and down further to a projected 1.4% for 2014, a slowdown in the rate at which business debt conditions are improving, is totally understandable,” added Experian South Africa MD Michelle Beetar.

Last year had also seen businesses lose confidence in the ability of the economy to grow at a rapid rate. This had resulted in a growing reluctance to invest in new ventures, with some com-panies only investing what was absolutely necessary.

However, Jammine noted that this was not conducive to a big upswing in economic growth.

“In the third quarter of 2014, fixed capital formation by the private sector was down 6.7% on the levels of a year earlier and for the first three quarters of the year [the decline] in fixed capital formation by the private sector was 2.4% on a year-on-year basis,” he said.

He added that it seemed as though the corporate sector has progressively built up its cash reserves to cope with an environment in which economic growth was expected to be far lower than previously envisaged.

This had “ensured their survival” but had also prevented the innovation and investment needed to uplift the county’s sustainable growth rate, Jammine stated.

Beetar explained that this survival strategy from private-sector businesses was reflected in the progressive decline in the average number of debtor’s days between 2009 and 2013.

“Thereafter, the length of the average debtors’ days’ book began rising back, reaching 51.5 days in the third quarter of 2014. This represents the extent to which overall business conditions slowed from the fourth quarter of 2013 onwards.

“Especially in the second and third quarters of 2014, the impacts of strikes in the mining and manufacturing sectors – which began in January 2014 – appear to have had some impact on eroding the financial health of businesses,” she said.

The number of average debtor’s days dropped back to 49.3 in the fourth quarter of 2014, which was in line with a general improvement in overall business conditions after the strikes had ended.

Although South Africa’s GDP growth may have improved and debtor’s days fallen in the fourth quarter of 2014, the strikes earlier in the year had impacted on business debt conditions with a lag, which seemed to account for the reduction in the overall BDI in the last quarter of the year.

BDI Covers Economic Sectors
For the first time, the BDI shared data for the nine major sectors of the economy.

Despite holding up earlier in 2014, the agriculture, services, transport, construction, finance and trade sectors showed some decline in the fourth quarter.

Wholesale and retail trade sector companies had the largest relative deterioration in business health, with their margins being severely constricted following declining growth in consumer spending.

“Conversely, those sectors which had suffered considerable declines in production earlier in the year as a result of strikes, most notably mining and manufacturing and the electricity-related businesses supplying these sectors, posted fairly substantial improvements in their BDI measures in the fourth quarter of 2014,” said Experian South Africa head of analytics David Coleman.

2015 Outlook
Beetar noted that the expected mild upturn in overall economic growth to over 2% in 2015 should improve the financial health of businesses. The 30% decline in fuel prices should also provide some extra financial manoeuvrability for many businesses, as well as for overall consumer demand.

However, concerns remained about industrial action and electricity supply.

“Although there might be a modest improvement in business conditions, capital formation is more than likely to remain slack. This would result in business debt conditions improving somewhat in the first quarter of this year,” Beetar concluded.