April 5, 2004

By Quentin Wray

Johannesburg - Insolvencies and compulsory company liquidations - both good indicators of the country's economic health - have fallen to record lows, the latest data from Statistics SA show.

Liquidations recorded for February fell 9.1 percent to 298 compared with 328 in the same month a year ago, and in the first two months of the year liquidations recorded fell 5.1 percent to 686 compared with 723 in the same period last year.

In February, compulsory liquidations fell 41.5 percent to 38, and voluntary liquidations shrank 1.1 percent to 260.
Stats SA said personal insolvencies in January fell 9.1 percent to 120 - its lowest level - compared with last year's 132.

Azar Jammine, chief economist at Econometrix, said this reflected the sharp decline in lending rates last year and helped explain why demand levels had been so buoyant in recent months.

He said further improvements in financial solvency would be seen in coming months as "ongoing benefits of the fall in interest rates filter through".

"However, in the second half of this year, the probability that interest rates will have fallen no further and may in fact begin to rise ... [we] will probably see the improvement in financial solvency reflected by insolvencies and liquidations levelling off, associated with a cooling off in the growth of domestic demand," he warned.

Jammine said the number of compulsory company liquidations indicated what was happening to the financial solvency of the corporate sector since voluntary liquidations were often the result of decisions taken not necessarily as a consequence of any financial difficulties.

This meant the financial health of the corporate sector was "obviously a source of encouragement with regard to forecasting the future investment activity by the business sector".
"Against this one has to weigh the adverse impact of the rand's strength on investment decisions", which was causing companies to shelve potential investment projects and this was "likely to restrict the exuberance with which the corporate sector will use its solvency to invest".

The Stats SA data back up the findings of the Investec purchasing managers index, which was released last week.

The index, which measures business perceptions, jumped to 57.9 in March from 52.6 in February. This indicated that the local manufacturing sector, which contracted sharply last year in the face of the strong rand and flagging global demand, had started recovering.

Because this is a perceptions-based index, a reading of 50 means there are as many optimists as pessimists, and readings of over 50 mean conditions are expected to improve. The index reading was at its highest level since the first half of 2002.

The jump in the index was "the first indication that manufacturing is recovering from the recessionary conditions that plagued the sector last year", said André Roux, the head of fixed-income investments at Investec Asset Management.

The Reuters Econometer, which polls economists, was flat in March with gains kept in check by concern over anticipated interest rate hikes and the impact of the strong rand on exports, which account for one-third of the economy.

Economists were also leery about interest rate hikes later this year as inflation pressures build up.