Comment by Frank Knight, CEO of Debtsource
News that South Africa’s economy grew by 2.5 percent in the second quarter of 2017 was most certainly well received and beat economist expectations. The market expected growth of 2.3 percent while some meaningful analysts had the GDP growth forecast set at no more than 1.4 percent. While this could be the first meaningful sign that SA’s economy is on the mend after spending some time in the doldrums, for many SA citizens there seems, as yet, little to celebrate. Political uncertainty, high unemployment and junk status still remain on the agenda as inhibitors to our growth; while for those in the construction industry there is no good news as this sector continued to contract – albeit at a slower pace.
Trade Credit – the type of credit which companies grant to other companies – is a leading indicator of how the economy is performing in “real” terms. The logic is that when the economy is performing well, companies are more likely to grant credit facilities to each other and vice versa.
We continue to see a decline in the approval ratio of trade credit transactions across almost the entire spectrum of the economy. As a comparative – over the period March to August 2016 – we saw an outright decline ratio of 12.86%. This compares to a decline ratio of 16.5% for the same period in 2017. Trade Credit encompasses short-term credit transactions (usually not outstanding for more than 60 days) and constitutes literally billions of Rands worth of finance which companies grant to each other. Almost every business in our economy finances their clients in this way. The need for trade credit also competes with other forms of credit – such as banking credit, and where banks slow their lending practices, companies have a greater demand to source credit from their suppliers.
Our experience at present is that companies are very nervous to extend facilities, and that this is a summary of their view on all the present risks that pervade in the market. Large corporate failures such as Stuttafords (which was started in the 1850’s) do nothing to bolster this confidence, but the number of business failures is not their only concern. With high inflation and interest rates, the effect of late payments from customers could be disastrous to the profitability of an enterprise, especially in a struggling economy where profit margins are already squeezed. To understand the impact of this – a credit transaction of R 100 000 that remains unpaid for 12 months will cost the credit grantor approximately R 16 000 by adding the cost of inflation (6%) to the cost of lending (10%).
We are also seeing a rise in the number of businesses that are turning to alternative forms of financing to fund late payments from their clients – such as invoice discounting. Sadly this is potentially only a short-term fix, as financiers charge high rates for such loans – again impacting on a company’s profitability.
We are particularly concerned with the effect of declining trade credit on small businesses. Where larger enterprises may have the depth in their balance sheet to withstand the effect of late or non-payment, small businesses are most vulnerable to even one bad debt or late payment. These have a knock-on effect – if you cannot collect money from your debtors on time, you can’t pay your creditors, so you have to fund the difference through loans or extensions, all of which negatively affect cash flow; profitability; employment and ultimately economic expansion.
I believes that it will be some time before the economy can be declared “out of the woods”, but that the latest GDP numbers are at least a green shoot. If we are able to follow this through with political certainty; interest rate reductions; and fixed investment from the private sector, the latest GDP numbers could be the sign that we’re on the right path.