1. QUARTER 3 – 2014
Increasing business operational
and financial challenges
Carel van Aardt & André Ligthelm
Bureau of Market Research, UNISA

2. 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

3. BVI – QUARTER 3 2014
Economic and
Business
Environment of SA

4. 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

5. Business Confidence
• BER Business Confidence Index
60
50
40
30
20
10
• 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 far
lower than the index score of 97.7 at the height of the recession in
2009.
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3
2013 2014

6. 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

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

8. 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.

9. BVI – QUARTER 3 2014
Business
Vulnerability
Index Model

10. 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

11. 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

12. 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

13. 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:

14. BVI Variables (changes over last 6 months)
1. International business environment
- International economic growth
- Opportunities for exports
- Import prices
2. SA macroeconomic environment
- SA macroeconomy
- SA business environment
3. Financial position of business
- Cash flow position of business
- Net wealth (balance sheet) of business
- Long-term financial sustainability
4. Business competitiveness
- Level of confidence in conducting business
- Level of confidence in the future of business

15. 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

16. BVI - QUARTER 3 2014
Findings:
Business
Vulnerability
Index

17. BVI Index: Q3 2013 to Q3 2014
Sector 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

18. BVI Index: Q3 2013 to Q3 2014
Business size Q3 2013 Q1 2014 Q3 2014 Change
Q1 to Q3
2014
Small 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

19. 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

20. 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

21. Constraints Index - Q3 2014
Findings:
Business
Constraints

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

23. 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 44.4
Government 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

24. 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

25. BVI - QUARTER 3 2014
BVI and
Financial
Variables

26. 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

27. BVI & Financial Variables (manufacturing sector)
Large Medium Small Total
Contribution margin ratio 0.95 1.00 0.96 0.96
Profit margin (%) 5.8 5.0 0.4 4.9
Expenditure to income ratio 0.95 0.98 1.01 0.96
Capex to expenditure ratio 0.02 0.01 0.02 0.02
BVI score 57.2 56.9 65.7 59.3

28. BVI & Financial Variables (trade sector)
Large Medium Small Total
Contribution margin ratio 0.95 0.97 0.94 0.95
Profit margin (%) 3.1 -1.2 0.4 1.8
Expenditure to income ratio 0.95 1.06 1.02 0.99
Capex to expenditure ratio 0.02 0.01 0.02 0.02
BVI score 57.2 55.9 61.6 57.9

29. BVI & Financial Variables (transport sector)
Large Medium Small Total
Contribution margin ratio 0.87 0.98 0.89 0.88
Profit margin (%) 4.7 9.3 0.9 4.2
Expenditure to income ratio 0.93 0.89 0.99 0.94
Capex to expenditure ratio 0.19 0.05 0.40 0.22
BVI score 58.6 62.5 61.5 60.9

30. BVI & Financial Variables (finance, business & real estate)
Large Medium Small Total
Contribution margin ratio 0.89 0.99 0.78 0.85
Profit margin (%) 14.2 17.5 14.8 14.7
Expenditure to income ratio 0.85 0.85 0.86 0.85
Capex to expenditure ratio 0.04 0.01 0.01 0.02
BVI score 62.0 61.8 67.4 64.0

31. BVI & Financial Variables (personal & community services)
Large Medium Small Total
Contribution margin ratio 0.86 0.89 0.90 0.88
Profit margin (%) 12.7 12.1 15.9 13.9
Expenditure to income ratio 0.85 0.85 0.84 0.85
Capex to expenditure ratio 0.06 0.03 0.01 0.04
BVI score 62.1 55.9 64.1 61.2

32. BVI - QUARTER 3 2014
Concluding
Remarks and
Implications

33. 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

34. 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.

35. BVI - QUARTER 3 2014
Thank
You