Questions raised over declining liquidations stats

A senior economist has questioned the validity of official liquidation data from Stats SA which he believes simply does not explain the true story around corporate health of companies and CCs in SA. “Does the 7.8% decline in liquidations in the first half of 2015 (1H‘15) compared to the same period in 2014 adequately depict the health of the SA economy?” Luke Doig of the Credit Guarantee Insurance Corporation (CGIC) asked. And he pointed out another anomaly. “Over the 2004-07 period, when gross domestic product (GDP) growth was strong (in the 5% region), actual corporate closures numbered around 600-800 per quarter. However the period of 2010 to date has seen a deteriorating GDP performance with two quarters of negative growth. Yet liquidations are at extremely low levels, with roughly 500 per quarter (average over the last 18 months).” Doig noted that the promulgation of the business rescue provision in May 2015 had led to approximately 30-40 monthly business rescue cases, which might otherwise have been reported as actual liquidations. “However,” he added, “the reported levels of business failures of just over 150 per month do not adequately explain the pain being experienced in the private sector. Also, declining levels of electricity availability have acted as a constraining factor on production – reflected in poor GDP figures and, obviously, on corporate profitability.” He also pointed out that the 17.4% and 6.8% declines in real GDP (seasonally adjusted annual rate) seen in agriculture and mining in Q2’15 must be especially concerning for the road transport and logistics sector. “And, with overall trade volumes stuck in neutral,” Doig said, “the outlook remains bleak.” His figures show that, on an annual basis, the transport, storage and communication sector accounted for 5.7% of all liquidations in 2011, 5.9% in 2012 and 3.7% in 2013 before recording 4.1% last year when fuel prices fell, providing a degree of input cost relief. “However despite this,” he added, “Q2’15 saw the broader transport sector account for 7.5% of corporate closures.” What Doig described as “one small glowing light” has been the R1.20cents per litre and R1.30c/l fall in petrol and diesel prices respectively over the past two months (August and September). “This,” he said, “could have been some 20c/l more if it were not for abject rand weakness. Indeed, with the currency as weak as it is, firms are also going to battle with the rising cost of imported intermediate inputs as well as with higher working capital costs as interest rates rise further. “And an economy already in recession is not going to help from the perspective of overall demand. The risks to elevated payment defaults remain skewed to the upside and are unlikely to improve materially over the course of the next year.”