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Official figures, which reveal that liquidations increased by 7.2 percent in the first five months compared with the same period last year, may not show the full extent of corporate distress.

June 27, 2008

By Ethel Hazelhurst Johannesburg

Official figures, which reveal that liquidations increased by 7.2 percent in the first five months compared with the same period last year, may not show the full extent of corporate distress.

Luke Doig, a senior economist at Credit Guarantee Insurance Corporation (CGIC), which provides credit insurance to firms, said CGIC figures showed a 25 percent jump in “advised overdue accounts” to 3 055 in the first six months of the year – the steepest increase since 1998, when the benchmark prime interest rate was 25.5 percent.

He said actual claims paid had risen by about 42 percent to a total of R69.6 million in the period. He predicted a lift in business failures of at least 15 percent this year.

The official data, released yesterday by Statistics SA, show that the total number of liquidations rose from 1 118 to 1 199. However, last month the number fell by 2.9 percent compared with the previous May.

Doig said he was “baffled” by the monthly decline, because the CGIC figures indicated a consistent deterioration in the ability of businesses to repay debt.

Stats SA said the 7.2 percent increase was due to a 58.3 percent rise in compulsory liquidations to 133 and a 3.1 percent lift in voluntary liquidations to 1066.

Although the number of compulsory liquidations remains relatively small, the sharp jump is a sign that business plans are rapidly being overtaken by events.

Individuals are also affected. Stats SA said insolvencies of individuals and partnerships rose by 9.7 percent to 602 in the first four months of the year, compared with the same period last year – only the second increase recorded since 2002.

The increase in liquidations is a sign that firms are not able to bear the increased cost of debt after a total 5 percentage point rise in interest rates over the past two years.

Last month, the worst casualty was the sector that includes finance, insurance, real estate and business services: 41 companies and 52 close corporations were liquidated. Of these, 89 were the result of a decision to close down in the face of mounting costs and declining revenue.

John Loos, a property strategist at First National Bank, said the real estate sector was deteriorating steadily in the face of the rate rising cycle, with repossessions rising and sales volumes falling.

Also hit was the sector that includes wholesale and retail trade as well as catering and accommodation: 19 companies and 61 close corporations went into liquidation. Of these, 77 were voluntary.