JOHANNESBURG – The expected improved economic growth in the third quarter contributed to a rise in the Experian Business Debt Index (BDI) to 0.261 in the third quarter of 2018 from 0.044 in the previous quarter, which was the weakest reading since the first quarter of 2017.
The better performing high-frequency economic data has raised hopes of South Africa exiting the recession in the upcoming quarter.
“The better-than-expected economic data experienced in Q3 is a relief from the recessionary conditions experienced in the first half of the year,” explains David Coleman, Chief Data Officer at Experian SA. “However, the BDI – an indicator of the overall health of businesses and the SA economy – suggests that despite improving business debt conditions, the index is still well down on levels experienced in 2014 and before that in 2011.”
Economic growth within the agricultural sector, which has in previous quarters has been the biggest driver of the recession, is expected to rise with improved drought conditions in the Western Cape. Growth should be further supported by improved economic data related to manufacturing, electricity production and principally wholesale and retail trade which is expected in the third quarter.
The positive BDI reading has also been boosted by other macroeconomic conditions, such as the spread between long and short-term interest rates, which is a leading indicator of economic growth. Furthermore, the gap between the CPI and PPI inflation rates increased in the third quarter, creating expanded profit margins for South African manufacturing businesses. The still strong US economic growth of 3.5 percent quarter on quarter also played a role.
Debt age ratio
The 30:60 day ratio, reflecting better shorter-term debt stress, improved to 18 percent in the third quarter from 23 percent in the second quarter. This represents the steepest reduction in the last three years. However, the 60:90 day ratio remained unchanged between the two quarters, indicating no deterioration or improvement for longer-term debt conditions. “Despite the continued improvement in overall business debt conditions, some companies are withholding payments for as long as possible,” explains Coleman. “This is an increasing trend amongst companies that are finding conditions to be tough.”
BDI by sector
The improvement in the overall BDI for the third quarter in 2018 was fairly broad-based. All economic sectors, including construction, showed a positive BDI. “Although construction showed marginal growth, this movement is still quite positive as the building and construction sector remains one of the weakest in the economy,” said Coleman. Mining and agriculture were the only two sectors to show a slight deterioration in the sector BDI for the third quarter compared with the second quarter.
He cautioned that although sector performance was in positive territory, these values are still low compared to previous years. “In no single sector was the BDI for Q3 2018 close to being the strongest in recent history. Simply put, the sectors’ performance relative to that post the 2010 World Cup is still at low levels owing to the low economic activity and sluggish growth.”
Outlook
While the BDI remains lower than previous years, the improvements that are keeping the BDI in positive territory, despite the technical recession in the previous two quarters, are significant – for now.
“As such, we anticipate the BDI to remain positive in the fourth quarter. However, this may tail off into early 2019,” said Coleman. “The substantial improvements in Q3 2018 are off the back of a low base in the previous two quarters. The same relative improvement cannot be expected in Q4.”