Here's why South African insolvencies are expected to rise by 4% in 2020

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Low economic growth in South Africa has driven a deterioration in payment behavior with business insolvencies expected to increase by 4% this year, a report by credit insurance company Euler Hermes shows.

In its Global Insolvency Report released on Wednesday, which covers 44 countries and 87% of global gross domestic product (GDP), Euler Hermes says global bankruptcies are still on the rise, implying higher export risks.

South Africa is expected to experience a protracted growth slowdown, with GDP remaining flat in 2020 and ticking up just 0.7% in 2021, which will mark the fourth consecutive year of below 1% real growth.

“Domestic demand is unlikely to sustain growth, in a context of a high tax burden, a 30% rate of unemployment as well as downward pressures on wages,” the report says.

“Low growth has driven a deterioration in payment behavior with business insolvencies up by 6% in 2019 and expected to increase by 4% in 2020.”

The country’s debt is likely to increase to 62.5% of GDP in 2020, while a budget deficit of around 5.9% of GDP leaves limited room for more fiscal stimulus for the ailing economy.

“Opportunities for the economy could have emerged from the country’s rich assets in commodities but the lack of reforms is most likely to prevent the country from reaping the benefits of exportations in this sector,” the  Euler Hermes report says.

Load shedding and land expropriation

“In addition, the lack of investments in structural infrastructural vulnerabilities, especially reflected by long-lasting electricity cuts happening this year, combined with increasing uncertainty on property rights, have led to investments outflows from the country.”

South Africa’s state power utility Eskom, which supplies about 95% of its electricity, has been forced to apply  load shedding on and off for months to avoid tripping the national grid, partly due to the frequent breakdown of its generating infrastructure after years of inadequate maintenance.

The other African country covered in the report, Morocco, will see a 5% rise in business insolvencies in 2020 compared with a 7% increase last year.

By African News Agency (ANA), Editing by Stella Mapenzauswa