Trade credit claims on the rise
Inventory drawdown for exports could signal return to growth
● Claims in the trade credit insurance industry are rising as companies take strain amid SA’s economic decline.
Trade credit providers are seeing rising claims from a year ago, a trend that has already prompted Santam, a major trade credit provider, to shut that part of its business three months ago due to high losses.
Trade credit insurance covers businesses against the risk of the companies they sell goods and services to not paying invoices.
Marsh, one of the biggest brokers in the industry, has seen a 30% spike in claims submitted this year compared to a year ago and a rise in the average value of the claims. That is a result of a lot of companies not being able to pay their creditors, it said.
Pieter Dingemans, national practice leader for trade credit at Marsh, said trade credit insurance follows very closely what is happening in the economy. “You see a lot of companies in distress,” he said.
Euler Hermes, another international trade credit insurance provider, said: “In our view the current economic scenario is deteriorating month by month … the external shock on global trade has severe consequences on mining activities, with repercussions on the manufacturing and construction sectors. We could probably expect credit risk to rise in these three sectors.” But it has not seen a spike in claims in these sectors.
Atradius, an international trade credit insurance provider, said in a report published in late November that SA’s insolvency outlook had deteriorated significantly over the past six months. “We project a 10% increase in insolvencies in 2019 and a further 4% increase in 2020,” it said.
Stats SA data published in November shows liquidations rose 8% in the first 10 months of this year compared to the same period last year, and the estimated number of insolvencies increased by 39.9% in the third quarter of 2019 from a year ago.
Warrick Robertson, chief operations officer at global insurer Coface’s local subsidiary, said the situation has put smaller businesses at a disadvantage.
“It gets into a vicious circle. Once you have a bad debt, news spreads that you can’t pay your debt and everyone starts pulling their credit facilities,” he said.
● There may be a glimmer of hope for SA’s economy despite the surprise contraction of 0.6% in the third quarter.
Stats SA, announcing the GDP data on Tuesday, also reported a large R9.5bn inventory drawdown in the manufacturing, trade and mining sectors, which boosted export figures for the period.
Exports of goods and services rose 3.5%, with vegetable products, precious metals, gems, vehicles and transport equipment leading the charge. Imports declined 6.8% as demand for mineral products eased.
The drawdown of inventories caused by increased sales, among others, is expected to trigger an increase in production in the fourth quarter.
Azar Jammine, chief economist at Econometrix, says the drawdown “can’t continue indefinitely” and the need to ramp up production may help to stabilise GDP for this quarter and in early 2020.
He says on the basis of improved trade, SA’s current account deficit should narrow. A deficit in the current account occurs when a country spends more on imports than the value it receives for its exports, resulting in a net outflow of funds from the country.
The current account deficit narrowed to 3.7% of GDP in the third quarter from 4.1%. A high deficit poses a risk to the economy because SA also runs a fiscal deficit — spending more than it receives in tax revenue.
Jammine says another positive for the economy was a 4.5% rise in gross fixed capital formation (investments in machinery) in the third quarter.
This is the second consecutive quarter in which gross fixed capital formation has increased. “It is forming the basis to get longerterm economic growth,” Jammine says.
But Nicky Weimar, senior economist at Nedbank, says investment by companies has largely focused on “making existing plant and equipment as efficient as possible”, rather than expansion. This implies companies are unlikely to add a significant number of new jobs in the near term, though it does not mean retrenchments are on the cards.
“At the moment you have a situation where companies have done a fair amount of restructuring.”
Weimar says banking is among the sectors where there could be further rightsizing in the near future as competition and pressure on earnings rise.
“We are increasingly seeing even banks starting to restructure and retrench.” Manufacturing and mining have been shedding jobs for the past few years. Agriculture has not employed as many people as in the past, she says.
“The primary and secondary industries have been struggling most. They are the most exposed to everything that is happening in SA. They are the ones producing and exporting.” Weimar says a restructuring of state-owned enterprises such as SAA and Eskom to improve efficiencies is likely to be difficult but the longer the delay, the more drastic the intervention will have to be.
“[SA’s GDP] really is a little bit of a road to nowhere. Some big decisions need to be made, some unpopular.”
Besides the urgent issues facing SAA and Eskom, SA also faces the challenge of weak revenue. October revenue and expenditure figures published by the National Treasury indicated that the fiscus is “headed for an even bigger shortfall”.
Reduced GDP means tax revenues are likely to be lower.
SA’s economic growth rate continues to be outpaced by population growth of 1.6%. Economists expect negative per capita growth following the third-quarter data.
SA has had five consecutive years of economic growth lagging population growth. Unless this is reversed, poverty and unemployment levels will remain elevated and living standards will deteriorate further.
Ratings agencies are concerned at SA’s per capita growth.
In November, S&P Global Ratings forecast real GDP per capita growth to be -1% this year from -1.3% last year. It said real GDP per capita growth has been shrinking since 2014.
Old Mutual Investment Group chief economist Johann Els said in a statement a Moody’s ratings downgrade to junk is now more likely early next year, unless the February budget moves the dial substantially.
“Despite what we saw in the disappointing medium-term budget, expenditure cuts could still be on the cards, but they would have to be significant to make any impact.”
Els says it will be difficult for the government to make meaningful expenditure cuts without addressing the public sector wage bill.
“Limiting growth in the wage bill is probably going to be easier than cutting jobs or freezing wage increases. This could lead to a lower budget deficit fairly quickly,” he says. “How likely is this to happen, however?”