Statistics South Africa released the updated Liquidations (May 2010) and Insolvencies (April 2010) data today. The data is produced monthly.
In May 2010, company/close corporation liquidations rose by a shock 35.7%y/y. The data is extremely volatile on a month-by-month basis, hence it is more useful to examine the data on a trend basis. During the three months from March to May, liquidations were up a more modest but still substantial 17.7%y/y, while in the first five months of the year they rose by 2.8%y/y.
While the ‘5-month trend’ rate of increase in liquidations during 2010 (2.8%y/y) is well below the 36.8%y/y recorded in Jan-May 2009, the overall level of liquidations remains extremely high by historical standards. (The data is still showing and upward trend). Liquidations are a typical late-cycle indicator and generally only peak well after interest rates have been cut and the economy has started to improve. This is certainly the case during the current business cycle. The reason for the lag is that businesses generally manage to survey the initial part of the recession using cash reserves and exiting credit lines. However, the longer and deeper the recession the more damage is inflicted and hence even when the economy starts to improve the business is typically highly indebted having depleted their scarce reserves. Obtaining additional finance then becomes extremely difficult and many business fail in the first few quarters of an economic recovery.
In contrast with the upward trend in liquidations, insolvencies are starting to show an improving trend after sky-rocketing in late 2008 to late 2009.
In April 2010 insolvencies fell by a very welcome 34.5%y/y, and in the first four months of 2010 insolvencies were down a healthy 22%y/y. Insolvencies also tend to be a late-cycle indicator, and are especially heavily impacted by an increase in unemployment (which was severe in 2009). Fortunately, households tend to benefit relatively quickly from sustained cuts in interest rates and lower inflation. In addition, as reflected in the most recent Quarterly Employment Survey, as well as the Quarterly Bulletin, household incomes have risen noticeably in the first few months of 2010; despite the job losses. This rise in incomes coupled with sustained low interest rates and an ability to negotiate/manage the debt situation with banks and retailers has meant that many consumers are slowly starting to move into a slightly more favourable financial position; certainly relative to what they experienced in late 2008 and most of 2009. This should continue to reflect in a downward trend in insolvencies, off a very high base, into 2011.
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