According to data from Statistics South Africa (Stats SA), the overall number of companies that have been liquidated increased 20.5% in the fourth quarter of 2020 compared to the same period in 2019. This fall has resulted in a 14.2% year-on-year increase.
This surge comes after liquidations rose 22.1% in November; they had decreased 9.1% in October 2020.
Liquidation is the process of permanently closing down a business and distributing its assets to claimants.
Stats SA analysed voluntary and compulsory liquidations of companies and close corporations. The latter refers to a company whose shares are held by a select few individuals, who are usually closely associated with the business.
Liquidations of companies increased 7.9% in December, from 1 079 in the same period last year; shutdowns of close corporations decreased 9.6%, from 963.
Most of the liquidations happened in the financing, insurance, real estate and business services sectors, followed by the trade, catering and accommodation, and then manufacturing sectors.
The liquidations come despite efforts by the government and the South African Reserve Bank to cushion the economy from experiencing further shocks caused by the Covid-19 pandemic and the subsequent lockdowns.
Last year, the Reserve Bank cut interest rates by 300 basis points, to 3.5%. Last week, the bank’s governor, Lesetja Kganyago, said the steps the monetary policy committee has taken to reduce rates could not be felt at the time because the economy was in lockdown. He said that since the lockdown has been relaxed, the effects of reductions should trickle down into the economy.
The government also injected R500-billion into the economy last year. However, companies seem to be struggling.
Stats SA data found 19 compulsory liquidations in December, compared to 12 in the same period in 2019.
Last year Stats SA recorded 134 voluntary liquidations. This was an increase from the 122 the previous year.
Voluntary liquidation occurs when a company, by its own choice, resolves to wind-up its affairs, whereas a compulsory liquidation is usually initiated by creditors.
Peter Worthington, a senior economist at Absa, said that the increase in liquidations and insolvencies reflects the lag in the effects of the pandemic’s blow to business and household finances.
“Also, the temporary income support scheme ended in October, although actual payments may have dragged on a bit. For firms, especially in the hard-hit tourism-related industries, bankruptcies will likely mount further,” he said.
Meanwhile, insolvencies increased 67.4% in November compared with October. This followed a decrease of 5.3% in October, and a drop of 29.9% in September.