Debt stress lev­els im­prov­ing

Lo­cal con­sumers and busi­nesses have a bet­ter grip on debt, sug­gest­ing that an economic turn­around is im­mi­nent.

Finweek English Edition - - ON THE MONEY - Ed­i­to­rial@fin­

asur­vey of 200 000 South African busi­nesses by global in­for­ma­tion ser­vices com­pany Ex­pe­rian shows debtors days de­clined from 49.7 in the third quar­ter of 2016 to 47 days in the fi­nal quar­ter of the year. This is the low­est level in three years and is a small but sig­nif­i­cant turn­around that sug­gests busi­nesses have a bet­ter grip on their debtors books.

There are other rea­sons to be op­ti­mistic. House­hold debt as a per­cent­age of dis­pos­able in­come (see graph) has been de­clin­ing since 2013, which means South Africans are able to pay off debt with greater com­fort.

At busi­ness level, com­pa­nies have gone through a pe­riod of delever­ag­ing in an­tic­i­pa­tion of higher in­ter­est rates.

The ra­tio of out­stand­ing debtors days of 90 day-plus to less than 60 days de­clined sharply, from 11.2 in the pre­vi­ous quar­ter to 9.3 over the last quar­ter to De­cem­ber 2016, and is now at the low­est level since 2014. A lower ra­tio means com­pa­nies are car­ry­ing less longer-term debt.

Data from Ex­pe­rian shows con­sumers are in some­what bet­ter shape than a few years ago, but re­main stressed.

Ac­cord­ing to fourth quar­ter data, of the roughly 2.2m ve­hi­cle fi­nance ac­counts in the coun­try, nine out of 10 are up to date. There are about 1.5m mort­gage ac­counts in SA, of which more than 91% are up to date.

Si­mon Rus­sell, man­ag­ing di­rec­tor of Ex­pe­rian South Africa, says while it is still early days, there are sev­eral in­di­ca­tors sug­gest­ing the worst may be be­hind us.

Ex­pe­rian’s Busi­ness Debt Con­di­tions In­dex (BDI) for the fourth quar­ter of 2016 re­flected a slight im­prove­ment to -0.03 from -0.098 in the pre­vi­ous quar­ter. “Al­though the lat­est read­ing is still in neg­a­tive ter­ri­tory, the change is still a pos­i­tive devel­op­ment for the BDI as it sug­gests we may be ap­proach­ing the turn­ing point of im­proved busi­ness debt stress con­di­tions in the next quar­ters,” says Rus­sell.

The BDI is an in­di­ca­tor of the over­all health of busi­nesses and their abil­ity to set­tle their debts. The rea­sons it re­mains in neg­a­tive ter­ri­tory are slow economic growth, lack of change in the ra­tio be­tween do­mes­tic and for­eign in­ter­est rates, and a slight de­te­ri­o­ra­tion in the gap be­tween pro­ducer and con­sumer in­fla­tion – sug­gest­ing a tighter en­vi­ron­ment for busi­nesses, in which they strug­gle to pass on cost in­creases.

Rus­sell says an­other fac­tor is at play in the im­prov­ing busi­ness and con­sumer debt pic­ture: “There is a great shift hap­pen­ing in the way com­pa­nies in­ter­act with their cus­tomers. There is a far greater level of an­a­lyt­i­cal de­tail on cus­tomer habits and ex­pe­ri­ence than was the case a few years ago, and this al­lows com­pa­nies to bet­ter seg­ment their cus­tomers and ser­vice them ac­cord­ingly.”

Ex­pe­rian’s pre­dic­tive in­di­ca­tor, called the Del­phi New Busi­ness score, as­sists in gaug­ing whether a new ap­pli­cant for credit will de­fault on re­pay­ments. This draws on mul­ti­ple data­bases and sources of in­for­ma­tion, in­clud­ing court judg­ment records, debt col­lec­tions and de­mo­graphic data, and in­for­ma­tion from the SA Con­sumer Credit Risk As­so­ci­a­tion. The av­er­age Del­phi score for credit-ac­tive SA con­sumers is cur­rently 600, im­ply­ing a 33% risk of de­fault, ver­sus a score of 620 in 2014, rep­re­sent­ing a prob­a­ble de­fault rate of 16%. That’s a wor­ry­ing devel­op­ment that needs closer mon­i­tor­ing, says Rus­sell. “While we are see­ing slight im­prove­ments in debt stress lev­els, we are see­ing al­most no growth in con­sumer spend­ing, while com­pa­nies and in­di­vid­u­als are very much in a delever­ag­ing phase,” adds Rus­sell.

At the same time, just half of the store cards in the coun­try are in good stand­ing. In times of economic dis­tress, con­sumers will de­fault on store credit cards be­fore other forms of debt. The ex­plo­sion in un­se­cured lend­ing con­trib­uted to the con­sumer boom of the last decade, but since then banks have tight­ened up their lend­ing in line with the Na­tional Credit Amend­ment Act af­ford­abil­ity guide­lines.

“A well-func­tion­ing credit mar­ket is the mark of a so­phis­ti­cated econ­omy,” says Rus­sell. “There are as­pects of the credit mar­ket that de­serve far more at­ten­tion, but over­all there are signs of im­prove­ment and we need to build on these. With­out credit, economic growth would be im­paired, though too much debt be­ing is­sued, as hap­pened in the 2000s, can also im­pair growth.”

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