South African businesses are taking longer to pay off their debts

The Experian Business Debt Index (BDI) fell from a reading of 1.438 in the first quarter of 2022 to 0.856. South Africa’s year-on-year GDP growth declined from a downwardly revised 2.7% to 0.5% over the same period, largely due to the intensification of rolling blackouts in June, which aggravated the slump in economic growth in the second quarter. The popular Eskom se Push app indicates South Africa has had 2,481 hours of rolling blackouts for the year to date, which equates to 103 days. 

Jaco van Jaarsveldt, head of commercial strategy and innovation at Experian Africa, says other factors that contributed to the decline in the BDI were the floods in KwaZulu-Natal and the impact of the steep 0.5% repo rate increase at the May MPC meeting, which at that time represented the biggest repo rate hike in more than a decade. “In addition, an interruption of food commodity exports from Ukraine also caused food prices to rise. Ironically, heightened inflationary pressures in supply chains contributed to a perceived increase in the margins of businesses reflected in the rise in the domestic producer price index [PPI] inflation rate to levels even steeper than those of the consumer price index [CPI] inflation rate,” he says.

The PPI inflation rate rose well into double-digit levels, leaving the differential between PPI inflation and CPI at more than 8%, providing a nice cushion to the business community, which may have assisted in tempering the deterioration in financial conditions caused by higher interest rates. 

However, Experian data points to a significant deterioration in debt age ratios. In particular, the 30- to 60-day ratio almost doubled, from a four-year low of 19% in the first quarter to 36.8% in the second quarter.  “We suspect that the realisation that interest rates domestically were set to increase sharply, created a tendency for debtors to withhold paying off their debts as rapidly as had been the case previously. Also, with the kind of disruption to economic activity caused by the floods and the load-shedding, businesses may have felt compelled to replenish cash flows by withholding the repayment of loans as rapidly as had been the case,” said Van Jaarsveldt. 

Looking ahead, Van Jaarsveldt believes that a sustained recovery in the BDI is unlikely, as he notes that the impact of further cumulative steep increases of 1.5% in the domestic interest rate in the third quarter is likely to be felt in subsequent quarters.  

“Businesses are advised to manage their debt prudently. The coming quarters are expected to become tougher as consumer distress intensifies and demand decreases, adding further strain to business debt stress levels. To navigate this challenging environment, businesses  should favour more conservative financial management practices that focus on strong cash flow management,” he concludes. BM/DM