business vulnerability index - q3 2014_november

Increasing business operational and financial challenges

Carel van Aardt & André LigthelmBureau of Market Research, UNISA

QUARTER 3 – 2014

Contents

1. Economic and Business Environment of SA

2. Business Vulnerability Index Model

3. Findings: Business Vulnerability Index Q3 2014

4. Findings: Business Constraints Q3 2014

5. BVI and Financial Variables

6. Concluding Remarks and Implications

BVI – QUARTER 3 2014

Economic and Business

Environment of SA

WEF Competitiveness Report 2014-15

• The good:– 7th out of 144 countries for financial market development– 31st for business sophistication– 32nd for goods market efficiency– 43rd for innovation

• The bad and the ugly:– 132nd out of 144 countries for health and primary education– 113th for labour market efficiency – 89th for macroeconomic environment– 86th for higher education and training

Business Confidence

• BER Business Confidence Index

• SACCI Business Confidence Index - July 2014 = 87.9, August 2014 = 89.0, September 2014 = 89.2 – all

lower compared to the corresponding periods of 2013, and all farlower than the index score of 97.7 at the height of the recession in 2009.

Q1 Q2 Q3 Q4 Q1 Q2 Q32013 2014

0

10

20

30

40

50

60

Year-On-Year Growth

2012 2013 2014

Gross domestic product 2.5 1.9 1.4

Household consumption expenditure 3.5 2.6 2.1

Fixed investment 4.4 4.7 3.2

Real disposable income of households 3.8 2.5 2.1

Employment growth 2.5 3.1 1.6

Producer price inflation 6.2 6.0 7.6

Investment in machinery 4.1 11.3 -3.7

Number of Businesses, 2013 Sector Small Medium Large Total

Agriculture, forestry and fishing 20 965 7 695 4 563 33 223

Mining and quarrying 6 406 650 180 7 236

Manufacturing 63 988 13 781 7 619 85 388

Electricity, gas and water 2 720 373 322 3 416

Construction 50 808 11 370 2 871 65 049

Trade 158 123 34 097 5 518 197 738

Transport, storage and communication 21 305 3 009 1 007 25 320

Finance, business services 301 495 33 293 9 421 344 208

Community, social and personal services 159 472 75 426 14 634 249 533

Total 785 282 179 693 46 135 1 011 111

The importance of the formal business sector in wealth creation

• The proportion of workers employed in the formal business sector of South Africa amounts to around 70% of the total number of employed persons.

• In 2012, total business income amounted to R6 612 billion which is 2.1 times the size of GDP.

• These figures clearly indicate the importance of the business sector in South Africa as a driver of economic growth and employment creation.

BVI – QUARTER 3 2014

Business Vulnerability Index Model

MBD / BMR Business Vulnerability Index

• Complements CFVI (70% jobs in business sector)• Confirms importance of business development• Identifies variables impacting on business vulnerability• Tracks changes in risks factors longitudinally• Disaggregation: sector and size• Ultimately identifies risk factors for business development• More than merely analysing business cycle

movements

Survey Methodology

• Cornerstone = regular business surveys• Modelled on OECD Handbook• Sample frame = full corpographic landscape (excluding informal/survivalists)• Quotas: sector and size• Telephone interviews: senior managers/owners• Establishment of a business panel

Research Instrument

• Two scales: - improvement/deterioration of risk factors during past 6 months - seriousness of a list of constraints that affect business operations• Rating on a 10-point scale• Elevated to an index (=100) for the BVI and constraints index

Interpreting the BVI & Level of Constraints

BVI: Index score Level of vulnerability

1 – 29.9 Extremely vulnerable

30 – 49.9 Vulnerable

50 – 69.9 Exposed

70 - 100 Secure

Index score of constraints Seriousness of constraint

1 – 29.9 Very serious constraint

30 – 49.9 Serious constraint

50 – 69.9 Mild constraint

70 - 100 No constraint

BVI:

Constraints:

BVI Variables (changes over last 6 months)

1. International business environment - International economic growth - Opportunities for exports - Import prices2. SA macroeconomic environment - SA macroeconomy - SA business environment3. Financial position of business - Cash flow position of business - Net wealth (balance sheet) of business - Long-term financial sustainability4. Business competitiveness - Level of confidence in conducting business - Level of confidence in the future of business

BVI Variables (changes over last 6 months)

5. Major business constraints - Political environment - Policy uncertainty - Weak government - Government red tape/bureaucracy - Municipal rates and taxes - Ease of doing business - Labour quality - Labour stability - Poor work ethic - Restrictive labour regulations - Level of crime and corruption - Quality of infrastructure - Access to finance - Price inflation

BVI - QUARTER 3 2014

Findings: Business Vulnerability

Index

BVI Index: Q3 2013 to Q3 2014Sector Q3 2013 Q1 2014 Q3 2014 Change Q1

to Q3 2014

Agriculture, forestry & fishing 61.7 66.2 57.4 -8.8

Mining & quarrying 58.5 62.1 60.5 -1.6

Manufacturing 60.6 63.4 59.3 -4.1

Construction 61.7 63.9 61.4 -2.5

Electricity, gas & water supply 38.9

Trade 61.7 52.5 57.9 5.4

Transport, storage, communication 58.4 57.1 60.9 3.8

Finance, business services 62.1 60.3 64.0 3.7

Personal, social, community 63.1 61.2 61.2 0

Composite BVI 61.1 60.9 60.2 -0.7

BVI Index: Q3 2013 to Q3 2014

Business size Q3 2013 Q1 2014 Q3 2014 Change Q1 to Q3

2014Small 58.6 60.5 64.3 3.8

Medium 61.5 59.9 57.5 -2.4

Large 63.1 62.3 59.1 -3.2

Composite BVI 61.1 60.9 60.2 -0.7

BVI Variables Q3 2014 (most vulnerable aspects)

• Import prices 42.0• Restrictive labour regulations 42.9• Political environment 44.3• Weak government 44.4• Price inflation 44.4• Labour stability 44.6• Red tape and bureaucracy 45.1• Policy uncertainty 46.3• Quality of infrastructure 46.6• International economic growth 47.0• Municipal utility rates and taxes 48.1• Poor work ethic 48.7• Levels of crime and corruption 48.8• Labour quality 48.8

Exogenous

Vulnerable (index 30-50) Index

BVI Variables Q3 2014 (least vulnerable aspects)

• Level of confidence in future of business 64.5• Opportunities for exports 65.6• Cash flow position of business 67.0• Net wealth of business 69.1• Long-term financial stability of business 71.4

Endogenous

Vulnerable (index above 60) Index

Constraints Index - Q3 2014

Findings:BusinessConstraints

Business Constraints

1 = serious constraint, 100 = no constraintConstraint Q1 2014 Q3 2014 Change Q1 to Q3Labour stability 57.5 44.6 -12.9Quality of infrastructure 58.4 46.6 -11.8Restrictive labour regulations 53.2 42.9 -10.3Policy uncertainty 55.5 46.3 -9.2Political environment 53 44.3 -8.7Labour quality 57.2 48.8 -8.4Ease of doing business 59.1 53.6 -5.5Price inflation 49.8 44.4 -5.4Municipal rates and taxes 48.6 48.1 -0.5Government red tape and bureaucracy 45.4 45.1 -0.3Weak government 43.1 44.4 1.3Level of crime and corruption 42.7 48.8 6.1

Business Constraints: By Business Size

Small Medium Large Total

Political environment 49.1 38.8 44.9 44.3

Policy uncertainty 50.2 42.7 46.0 46.3

Weak government 49.2 38.7 45.3 44.4Government red tape and bureaucracy 51.1 40.4 44.0 45.1

Municipal rates and taxes 52.0 43.9 48.5 48.1

Ease of doing business 55.3 50.3 55.1 53.6

Labour quality 51.1 47.9 47.5 48.8

Business Constraints: By Business Size

Small Medium Large Total

Labour stability 49.4 40.7 43.8 44.6

Poor work ethic 53.8 42.5 49.7 48.7

Restrictive labour regulations 43.8 40.3 44.4 42.9

Level of crime and corruption 55.6 43.4 47.7 48.8

Quality of infrastructure 45.6 47.5 46.7 46.6

Access to finance 48.6 58.2 56.8 54.7

Price inflation 46.8 42.1 44.4 44.4


BVI and Financial Variables

BVI & Financial Variables (all businesses)

Large Medium Small Total

Contribution margin ratio 0.92 0.99 0.94 0.92

Profit margin (%) 5.3 4.1 4.6 5.0

Expenditure to income ratio 0.93 0.99 0.97 0.95

Capex to expenditure ratio 0.07 0.02 0.04 0.06

BVI score (Q3 2014) 59.1 57.5 64.3 60.2

BVI & Financial Variables (manufacturing sector)



Profit margin (%) 5.8 5.0 0.4 4.9



BVI score 57.2 56.9 65.7 59.3

BVI & Financial Variables (trade sector)



Profit margin (%) 3.1 -1.2 0.4 1.8



BVI score 57.2 55.9 61.6 57.9

BVI & Financial Variables (transport sector)



Profit margin (%) 4.7 9.3 0.9 4.2



BVI score 58.6 62.5 61.5 60.9

BVI & Financial Variables (finance, business & real estate)



Profit margin (%) 14.2 17.5 14.8 14.7



BVI score 62.0 61.8 67.4 64.0

BVI & Financial Variables (personal & community services)



Profit margin (%) 12.7 12.1 15.9 13.9



BVI score 62.1 55.9 64.1 61.2


Concluding Remarks and Implications

Concluding remarks

• The macroeconomic environment is becoming less facilitative towards business growth

• The broader policy, social and political environment in which businesses operate is also not business friendly

• Most businesses are feeling exposed and constrained

• Government-related (exogenous) constraints are particularly serious

• All sectors and business sizes are exposed to constraints

• Available business financial data reflect the BVI figures in practice

Implications

The following are the most important implications for credit managers:• Businesses are becoming increasingly vulnerable due to

shrinking profit margins, client payment defaults and business unfriendly environment in which businesses operate

• The ability of businesses to adapt and deal with constraints is an increasingly important indicator of anti-fragility

• Other predictors of business success: product/service diversification and innovation, in-house skills development, strategies to become more competitive, improved cash-flow management, visionary leadership, etc.

Thank

You


business vulnerability index - q3 2014_november

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