EXPERIAN BUSINESS DEBT INDEX (BDI) RESULTS FOR Q1 2014

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2 EXPERIAN BUSINESS DEBT INDEX (BDI) RESULTS FOR Q Debt stress amongst businesses continued to improve in Q1 The Experian business debt stress indicators for South Africa show that debt stress amongst businesses continued to fall in Q Chart 1. Chart 1 Q Q Q Q Index >0= Improving business conditions <0 = Deteriorating business conditions Macroeconomic factors influencing the Q BDI The Experian Business Debt Index for Q1 2014, possibly surprisingly, recorded a third consecutive quarter of improvement. This was despite the fact that the domestic economy appeared to be severely negatively affected by the strike in the platinum mining industry which began in the final week of January. In the wake of the resultant sharp decline in annualised GDP growth, to -0.6% in Q1 2014, from 3.8% in Q4 2013, one might have expected to see a deterioration in business debt conditions during the quarter, but the opposite turns out to have been the case. Exports still performing well There are a number of reasons to account for the relative improvement in the index. Although the global macroeconomic environment did not sustain much of an improvement through Q1, part of the feebleness of that environment was attributed to weather-related factors. As such, exports were not as negatively affected as one might have anticipated superficially, with businesses abroad building up inventories to accommodate a latent upswing in demand (see Chart 2).

3 Chart 2 days continued to decline over much of Q1 (with the exception of January 2014), as they have been doing for the past five years (Chart 4). Chart 4 Excluding Mining and Manufacturing, GDP Growth Actually Improved Marginally Even on the domestic front, even though the mining strike hammered both the mining and manufacturing sectors, the remainder of the economy was nowhere near as severely affected, with some sectors even posting modest improvements (see Chart 3). Producers specifically benefited in the domestic environment by virtue of the fact that they were finally able to achieve significant revenue increases from price hikes at levels well in excess of the CPI inflation rate. In addition, they were able to enjoy for the first time in many years a modest increase in the interest rate earned on their cash balances. Chart 3 Sharp decline in average debtors days in February and March Over and above the more favourable factors impinging upon the macroeconomic environment, more than anything the business debt index received a strong boost from the fact that outstanding debtor The absolute number of debtors days outstanding declined, and the duration of outstanding debts, shortened considerably further in February and March. As a result, the y/y growth rate in average debtors days in Q1 improved slightly. This seems counterintuitive given the sharp decline in economic growth during the quarter. However, it would appear to reflect a situation in which businesses are becoming progressively more pessimistic about the outlook for the economy and accordingly are continuing to batten down the hatches and to build up the strength of their balance sheets to withstand the onset of adverse economic conditions. Investment necessary to grow businesses at a faster pace is being held back to a minimum. One may have hoped that the completion of the general election peacefully and successfully might engender an improvement in the investment environment. However, the measurement of the Q1 BDI relates to the situation prior to the election and therefore will have encompassed the environment of uncertainty. The reduction in outstanding debts is probably also a function of more aggressive efforts by the credit management offices of companies to recover debts owed.

4 Financial health of businesses more sound than that of consumers Naturally, should economic conditions deteriorate a lot further - and with no resolution to the mining strike this situation is becoming ever more probable - there is bound to come a point when businesses are no longer able to accumulate cash and instead start seeing their stockpile of reserves being wound down. However, as of the current situation, the financial health of the business sector seems a lot more palatable than that of the consumer sector. What is also helping is the fact that access to unsecured loans by businesses seems to be more readily attainable than in the case of individual households (see chart below). Chart 5 Resolution of mining strike vital to maintaining businesses financial health The implication of the improvement in the Experian BDI is that there are at least some forces in the economy working against an unduly sharp downturn in economic activity. One of these is the fact that businesses appear to be in a very sound financial position to survive the ravages of lower economic growth. Nonetheless, resolution to the mining strike and the associated potential improvement in economic growth is essential to sustain the momentum of balance sheet consolidation in the business sector.

5 Explanatory notes regarding the Experian Business Debt Index What is the Experian Business Debt Index? The Experian Business Debt Index is an indicator of the overall health of businesses, as well as the South African economy. It measures the relative ability for business to pay its outstanding creditors on time and tracks macroeconomic indicators that can impact on the ability of companies to pay its creditors. A number of debtors and macro-economic variables are combined into a single indicator of business debt stress. How to interpret the index The index is constructed around a mean value of zero. Values above zero indicate less business debt stress and values below zero indicate business debt stress. Given the underlying data of the index, relative higher levels of debt indicate a weakening in the ability to pay outstanding creditors. Higher interest rates result in higher borrowing costs and an increase in business stress. Relatively higher production costs vs consumer cost decrease operating margins of business, while higher domestic and international growth could result in a better trading environment for businesses. Measured by using principle components The Experian Business Debt Index (BDI) is constructed using principal components analysis. This is similar to the St. Louis Fed s Financial Stress Index (STLFSI) and the Kansas City Fed s FSI (KCFSI) in the USA. The principal components analysis is a statistical method that is used to extract factors responsible for the co-movement of a group of variables. As such, it is assumed that the business stress is the primary factor influencing the co-movement and by extracting the principal components, it is possible to build and index with a useful economic interpretation. Variables included The Experian Business Debt Index is made up of Experian business debtors data and public domain data. Variables include the following: debtor days ratio (debt compared to initial amount invoiced 30 days ago); debtor days ratio (debt compared to initial amount invoiced 60 days ago); - South Africa consumer inflation and producer inflation spread; - Interest rate spread (Repo vs US Federal Fund rates); - Interest rate spread (R157 vs Repo); - Real SA GDP (year-on-year percentage change); - Real US GDP (year-on-year percentage change). No provision is made for any leads or lags in any of the variables. Methodology used to construct the index The way the index is constructed is first to demean the individual indices by subtracting the index value from the index average and dividing it by the sample standard deviation (SD). The indices can now be expressed in the same units. Secondly, the method of principal components is used to calculate the coefficients of the variables in the EBSI. These coefficients are scaled so that the standard deviation of the index is 1. Lastly, each of the indices is multiplied by its respective adjusted coefficient. When the index is updated quarterly, the values of the Experian Business Debt Index can change. This can occur either through a change in the coefficients (an updated re-estimation) or as a result of the change in the actual values of the variables in the original sample. This happens because the data are demeaned and standardised and as a result the value of the original sample will change as the sample mean and sample standard deviation of the variables changes. 1

6 Experian Experian is the leading global information services company, providing data and analytical tools to clients around the world. The Group helps businesses to manage credit risk, prevent fraud, target marketing offers and automate decision making. Experian also helps individuals to check their credit report and credit score, and protect against identity theft. Experian plc is listed on the London Stock Exchange (EXPN) and is a constituent of the FTSE 100 index. Total revenue for the year ended 31 March 2014 was US$4.8 billion. Experian employs approximately 16,000 people in 39 countries and has its corporate headquarters in Dublin, Ireland, with operational headquarters in Nottingham, UK; California, US; and São Paulo, Brazil. Econometrix (Pty) Ltd Econometrix is South Africa s largest independent macro-economic consultancy based in Johannesburg. We are privately owned and therefore totally independent of any official organisation or pressure groups. Econometrix which has a successful track record of close to 30 years - is committed to on-going research and analysis of economic fundamentals thereby ensuring a sound basis for future business decisions. These services are provided through a range of complimentary products and to more than 150 South African and international organisations. Our approach is to empower our clients with quality decision support intelligence and assistance regarding the economic and financial environment, and assist them in their strategic and financial planning processes. Our in-depth analysis of economic fundamentals aims to assist our clients in commanding the economic environment and in identifying opportunities and risks. Analysis Econometrix ilsef@econometrix.co.za Enquiries Experian BDIreport@experian.co.za