Credit bureau Experian released new data showing a significant improvement in business debt conditions in the first quarter, but that trajectory is likely to ease in the coming quarters.

The Experian Business Indebtedness Index (BDI) increased in Q1 2021 from Q4 2021 to 1.435 from an upwardly revised 0.970.

The main driver of the 1Q BDI improvement was the domestic economy and US economic growth this quarter. Domestically, the negative effects of looting and rioting that occurred in the third quarter of 2021 continued to diminish in the first quarter of 2022.

Jako van Jaarsveldt, head of commercial strategy and innovation at Experian Africa, said: “A combination of stronger-than-expected local and international economic growth, together with continued stabilization of supply chains following the 3Q robbery, contributed to the improved BDI readings in 1Q.

“While overall positive, caution should be taken not to read too much into these numbers given the impact of the April floods in KwaZulu-Natal, a significant increase in power outages and the ongoing war in Ukraine, which is expected to , will reverse the upward trend in the coming quarters. »

Macroeconomic factors affecting 1 sq. 2022

Macroeconomic factors that contributed to the 1Q BDI improvement were stronger domestic and US economic growth in the quarter. In addition, commodity prices remained high in the first quarter of this year, supported by a global supply shortage caused by supply chain disruptions stemming from lockdowns imposed to combat the micron variant of Covid-19.

During this time, the Russian invasion of Ukraine worsened this deficit. In addition, the reimposition of strict lockdowns in several Chinese cities has increased supply disruptions, particularly for fossil fuels and food commodities. Domestic interest rates continued to be at levels well below those prevailing before the onset of Covid-19; this gave support to retail sales, as did improving the health of personal balance sheets.

Indicators of corporate debt in the 1st quarter of 2022

However, the improvement in BDI in the first quarter of 2022 was not limited to domestic macroeconomic factors. Experian’s data on debt age ratios also had a significant positive impact – both for the 30-60 day and 60-90 day debt age ratios.

The 30-60 day old debt ratio improved from 24.6% to 22.2% in 1Q. The improvement in the 60-90 day debt age ratio was even more significant from 9.5% to 6.3%.

In the 30-60 day old ratio, the upward trend has been quite sharp since the all-time highs seen in Q2 2020 at 36.1%.

“The ability of borrowers to benefit from lower debt servicing costs following the 30% cut in domestic interest rates in the first half of 2020 certainly contributed to this improvement,” van Jaarsveldt said.

BDI by sector

The improvement in the BDI in the 1st quarter affected most sectors of the economy. Each of the nine sectors recorded a positive BDI in Q1 2022, indicating an improvement in financial health.

The only sector that saw a deterioration in business debt conditions in the fourth quarter of 2021, construction, returned to positive debt in the first quarter of this year. Only in the case of agriculture and financial services did the BDI readings deteriorate from extremely strong to modestly strong in the first quarter of this year. This, in turn, was a function of comparisons to a strong base in the prior quarter.

Particularly impressive increases in BDI were seen in manufacturing and, relatedly, electricity. These improvements reflect a return to normalcy following the devastation to industrial activity caused in KwaZulu-Natal in the third quarter of 2021 by social and political unrest at the time.

BDI by company size – SME ratio

The average number of days outstanding for SME debtors fell to 61.4 in Q1 2022 from 64.3 in Q4 2021 and 72.4 in Q3 2021 at the height of the looting.

SMEs are still far more stressed than larger companies, compared to 50.5 days in arrears for the entire sample of companies for which Experian has data. However, the number of days outstanding for SME debtors has fallen to its lowest level in three years, Experian notes.

Similarly, the SME stress ratio (the number of SMEs with less than 60 days of debt outstanding compared to businesses with more than 90 days of debt) fell to 22.3% in Q1 2022 from 35.4 and 25.2 days of debt outstanding respectively for Q3 and Q4 2021. This ratio is the lowest since Q4 2019.

BDI is expected to decline

Unfortunately, the improvement in business loan conditions seen in Q1 2022 is likely to be reversed in Q2 and possibly in subsequent quarters as well, Experian notes.

Domestically, mining and manufacturing data for April reflected a significant decline compared to earlier months of the year. Intensification of electricity load shedding and strikes in both sectors appear to have had a negative impact on output.

The heavy rains and floods that hit KwaZulu-Natal in April are likely to have damaged several businesses in the region, especially those involved in manufacturing, sugarcane cultivation and importing or exporting through Durban Harbour, which was severely damaged.

The second quarter is likely to be negatively impacted by a cumulative 0.75% increase in the repo rate between November and March and an additional 0.75% rate increase in May. Interest rates are also likely to rise during the rest of the year due to rising inflation, especially food and fuel prices.

Van Jaarsveldt said: “The adverse impact on business debt conditions is unlikely to be limited to domestic factors. At the international level, the continuation of the war in Ukraine with no clear signs of an end threatens a shortage of vital industrial materials and food products. Continued global price pressures will force major central banks around the world to continue raising interest rates more sharply than expected.

“The South African consumer will also feel the pain of negative global sentiment. The latest consumer inflation (7.4% in June 2022) is the highest since May 2009 and is expected to remain high for some time to come. The effects of continued rising cost of living and rising debt servicing costs are expected to have a negative impact on consumer spending and thus have a negative impact on BDI.”

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