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Business Risk Drops as Economic Conditions Improve

Monday, 18 March 2013

Business Risk Drops as Economic Conditions Improve

More than 32,000 New Zealand companies are now a lower risk of experiencing financial distress in the next 12 months, representing an improvement over the past three years. This is in line with a steady recovery in economic sentiment as firms prepare to increase their activity and cut back their risk.

Research conducted by Dun & Bradstreet indicates that the number of firms with a lower risk rating in the three months to February 2013 is 5.2 per cent higher than the number of firms with a lower risk rating over the same period in 2009.

D&B’s data is in line with information coming out of the Reserve Bank 2, which suggests that residential investment is increasing and that GDP is predicted to grow between two and three per cent over the year. Treasury figures also indicate more positive domestic demand and strong retail sales, which will likely impact on business performance in the coming months. The data is also consistent with D&B’s recent Trade Payments Analysis3, which indicates businesses were quicker to pay their bills during the December quarter 2012, down by one week over the past 12 months.

According to Lance Crooks, D&B New Zealand’s General Manager, the company risk changes are consistent with recent improving economic conditions.

“We are seeing many companies improve their risk rating, following the domestic recovery from the global financial crisis. The tens of thousands of New Zealand businesses that now present a lower risk of experiencing financial stress is a significant turnaround from the period between 2008 and 2011.

“In particular, the data from 2008 and 2009 reflects volatile global financial conditions during that period, which had a flow-on effect on New Zealand companies in terms of risk ratings.”

Additionally, the number of firms rated a lower risk in 2013 has also steadily ticked upwards over the past three years, jumping from just 1.4 per cent of all firms in 2010 to seven per cent of all firms in 2013. This follows a 1.5 per cent increase in the number of re-rated companies from 2008 to 2009, and the subsequent fall in re-rated companies from 2009 to 2010.

According to Stephen Koukoulas, Economics Advisor to Dun & Bradstreet, the run of positive news on the New Zealand economy continues to flow.

“An increasing number of companies are scaling back their risk of financial distress,” said Mr Koukoulas.

“Together with a fall in trade payments, which was reported last month, the outlook for the economy in New Zealand is increasingly favorable.

“Firms are clearly cashed up and are awaiting the right opportunity to increase their activity. With the RBNZ leaving interest rates at historically low levels and New Zealand’s largest export market – Australia – in the early stages of a growth pick-up, New Zealand could be on the cusp of a sharp lift in activity.

“This would be welcome given the recent experience of the global financial crisis and earthquakes which were obviously extreme negative influences on economic activity.”

A closer look at D&B data reveals that a significant proportion of firms in certain industries have lowered their risk rating over the three months to February 2013. Seventeen per cent of those in the electric, gas and sanitary services sector improved their risk rating, up nine per cent since the three months to February 2009. This is also up from only two per cent during the same period in 2008. Thirteen per cent of construction firms also received an improved risk rating in 2013, up six per cent since 2009 and representing an 11 per cent increase since 2008.

The fishing and forestry sectors experienced the smallest proportion of improved risk ratings, at five per cent and eight per cent respectively. In 2008, no fishing firms improved their risk and only three per cent of all forestry firms improved their risk; and in 2009, three per cent of fishing firms and six per cent of forestry firms had their risk levels lowered.

Additionally, one in five communications firms lowered their risk rating over the three months to February 2013. This is compared to 2008 and 2009, where only three per cent and five per cent of communications firms were respectively moved to a lower risk category. This aligns with D&B’s Trade Payments Analysis, which indicated firms in this sector improved their payment times by nine days year-on-year, to 44 days on average.

Ten per cent of firms in the retail industry were also re-rated as having a lower risk of experiencing financial distress in the coming year, steadily up from one per cent in 2008 and seven per cent in 2009. This comes as Statistics New Zealand data4 reveals consumers spent more on their debit and credit cards in February, the fifth consecutive monthly increase and the largest since August 2012.

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