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Economic factors affecting SMEs this month

Enoch Godongwana’s Budget Speech has created a mixed reaction in the market, but has done little to move the needle in general sentiment. Reactions to the speech range from claims of political grandstanding in an election year, to a more positive outlook, seeing the start of a potential road to economic security that is injecting some parts of the wider business community with a cautious sense of optimism.

The strategy outlined by the Minister aims to foster economic growth, safeguard the economy, and stabilise the overall fiscal environment. All of which bodes well for the country and the SME sector.

However, against a backdrop of business foreclosures and unpredictable macro-economic factors, there does need to be a reality check. But facing reality doesn’t necessitate pessimism; there’s always a lot to be optimistic about if you look hard enough and plan for success.

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Overberg Asset Management

Realistically, any plans will take time to implement and, with a number of significant challenges thundering down on the economy, it feels like our SMEs need to keep on doing what they have been doing for the foreseeable future – drawing on their own resilience to move forward – not only for themselves and the sector, but also for the economy. According to the International Finance Corporation (IFC), SMEs collectively account for roughly 34% of South Africa’s GDP, so without Business Owners fighting tooth and nail to continue contributing, the country faces a stark reality.

Miguel Da Silva, Managing Executive of Retail Capital, a division of TymeBank, delves into what SMEs should be watching out for in March. “As tough as things are, there are untold numbers of success stories which should give us all hope.”

Repo rate agony prolonged

Last month, high interest rates were highlighted as being a key contributor to the pressure on the SME sector in South Africa, and with another repo rate announcement looming large in March, this hasn’t changed.

In an attempt to control inflation, over the course of 2023, the South African Reserve Bank (SARB) raised the repo rate from 7% to a 14-year high of 8.25% where it has stabilised in 2024. And while stable is good, the economy is collectively holding its breath for some small reprieve.

According to Allan Gray’s latest markets and economy insights, the market is pricing for the SARB to begin cutting interest rates in mid-2024, which would be in line with the SARB’s quarterly projection model. While this projection is only a policy suggestion, it does outline a significant proposal of short and shallow cuts, with the repo rate ultimately dropping from 8.25% to 7.3% by the end of 2025.

A decrease in the repo rate by close to 1% is a significant step, but given the time frame, this is not an immediate solution for SMEs who have been biting the bullet for far too long. With no short-term relief in sight, the advice for business owners is to take proactive measures, and these could range from debt restructuring, adapting to consumer spending patterns, managing investments, and ensuring cash flow is optimized even if squeezed.

It’s tough at the top, with so many economic, social and political factors to balance, but we urge the Governor to examine the factors that cause our high inflation rate and implement measures to alleviate the problem where possible so we can see a reduction in interest rates by May 2024.

More petrol price hikes on the cards

Almost all too predictably, there was another steep petrol price, with the cost of unleaded petrol hiked by a massive R1.21 per litre from Wednesday, 5th March.

The knock-on effects of the petrol and diesel price hike is that every player, in every sector of the economy could be forced to pass the increased cost of doing the same business, onto their customers. This means SMEs across the board will feel the pinch along their supply chain. Businesses will see an increase in costs for production, transport, and increasingly the effective management of load-shedding.

With analysts predicting more hikes in the coming months, it is imperative that owners consider prolonged increases when planning their budgets for the forthcoming financial year.

It might seem obvious, but it is important to note that increases in petrol prices don’t just affect people’s wallets. With the far-ranging effects of fuel prices, there is a real chance of a potentially devastating impact on the country’s food supply. For our farmers, who we rely on for the food we have on our tables, there is an even heavier burden. There are very few aspects of the farming industry that don’t rely on fuel in some way, and predominantly diesel. So, with the price of diesel set to increase by a hefty R1.20 per litre, food price inflation is something that needs to be planned for and mitigated against.

In whatever way they can, financial institutions need to get into the habit of supporting small-scale farmers.

Food Security in the spotlight

By most accounts, there is a real and present threat to short term food security in South Africa. Weather extremes, fuel price increases, and logistic and transport issues linked to the rail and shipping sectors have compounded challenges to the agricultural sector.

Wandile Sihlobo, Chief Economist at the Agricultural Business Chamber of South Africa, warns that that if the February heatwaves and lack of rain persists, the level of summer grains produced will significantly decrease. In various areas, crucial grains like maize, sunflower seeds, and soybeans are currently in the pollination phase, and ideally March should see increased rainfall to boost overall yields. However, current weather forecasts show a real threat to the country’s food production, and security.

Additionally, the global grain shortage caused by the Ukrainian conflict exacerbates the challenges of ensuring we get food on our tables.

Food scarcity will place an enormous financial burden on SMEs in the agricultural space at a time when they are already struggling to make ends meet. With around 2.5 million small-scale farmers across the country, both they and larger commercial farmers play a pivotal role in the nation’s food security.

This loss of domestic crop yield – and loss of international crop availability – year on year, should be of concern for all sectors of the economy, but perhaps none more so than for SME retailers.

While assistance is needed for farmers to maintain high level of crop production, SME owners whose product supply depends on the agricultural sector must ensure their offerings are secure in case of scarcity.

Being open to diversifying product portfolios, investing in goods with longer shelf lives and fostering strong relationships with suppliers will go some way to mitigating the risk posed by scarcity.

Looking ahead

Something to mention now, but focus more on later are the upcoming elections for 29th May.

Economists agree that the government will continue to walk a tightrope between political aspirations and economic realities in the next three months as we lead up to the elections, so now is the time to make voices heard and expectations clear.

While three months is a long time in business, when viewed in the context of a four-year election cycle, three months is basically next week, and we will all do well to consider a full four-year cycle when deciding on aspirations for the after the election.

This is especially true for the country’s SMEs, who listed political and economic instability as by far their top concern in Xero’s latest (sixth) State of South African Small Business report.

Security, stability, and success must undoubtedly be the outcome we are looking for, but how we get there, supporting the 3 million SMEs that prop up the economy, is something that needs to be considered carefully, and openly planned for.

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Enoch Godongwana’s Budget Speech has created a mixed reaction in the market, but has done little to move the needle in general sentiment. Reactions to the speech range from claims of political grandstanding in an election year, to a more positive outlook, seeing the start of a potential road to economic security that is injecting some parts of the wider business community with a cautious sense of optimism.

The strategy outlined by the Minister aims to foster economic growth, safeguard the economy, and stabilise the overall fiscal environment. All of which bodes well for the country and the SME sector.

However, against a backdrop of business foreclosures and unpredictable macro-economic factors, there does need to be a reality check. But facing reality doesn’t necessitate pessimism; there’s always a lot to be optimistic about if you look hard enough and plan for success.

- Advertisement -
Overberg Asset Management

Realistically, any plans will take time to implement and, with a number of significant challenges thundering down on the economy, it feels like our SMEs need to keep on doing what they have been doing for the foreseeable future – drawing on their own resilience to move forward – not only for themselves and the sector, but also for the economy. According to the International Finance Corporation (IFC), SMEs collectively account for roughly 34% of South Africa’s GDP, so without Business Owners fighting tooth and nail to continue contributing, the country faces a stark reality.

Miguel Da Silva, Managing Executive of Retail Capital, a division of TymeBank, delves into what SMEs should be watching out for in March. “As tough as things are, there are untold numbers of success stories which should give us all hope.”

Repo rate agony prolonged

Last month, high interest rates were highlighted as being a key contributor to the pressure on the SME sector in South Africa, and with another repo rate announcement looming large in March, this hasn’t changed.

In an attempt to control inflation, over the course of 2023, the South African Reserve Bank (SARB) raised the repo rate from 7% to a 14-year high of 8.25% where it has stabilised in 2024. And while stable is good, the economy is collectively holding its breath for some small reprieve.

According to Allan Gray’s latest markets and economy insights, the market is pricing for the SARB to begin cutting interest rates in mid-2024, which would be in line with the SARB’s quarterly projection model. While this projection is only a policy suggestion, it does outline a significant proposal of short and shallow cuts, with the repo rate ultimately dropping from 8.25% to 7.3% by the end of 2025.

A decrease in the repo rate by close to 1% is a significant step, but given the time frame, this is not an immediate solution for SMEs who have been biting the bullet for far too long. With no short-term relief in sight, the advice for business owners is to take proactive measures, and these could range from debt restructuring, adapting to consumer spending patterns, managing investments, and ensuring cash flow is optimized even if squeezed.

It’s tough at the top, with so many economic, social and political factors to balance, but we urge the Governor to examine the factors that cause our high inflation rate and implement measures to alleviate the problem where possible so we can see a reduction in interest rates by May 2024.

More petrol price hikes on the cards

Almost all too predictably, there was another steep petrol price, with the cost of unleaded petrol hiked by a massive R1.21 per litre from Wednesday, 5th March.

The knock-on effects of the petrol and diesel price hike is that every player, in every sector of the economy could be forced to pass the increased cost of doing the same business, onto their customers. This means SMEs across the board will feel the pinch along their supply chain. Businesses will see an increase in costs for production, transport, and increasingly the effective management of load-shedding.

With analysts predicting more hikes in the coming months, it is imperative that owners consider prolonged increases when planning their budgets for the forthcoming financial year.

It might seem obvious, but it is important to note that increases in petrol prices don’t just affect people’s wallets. With the far-ranging effects of fuel prices, there is a real chance of a potentially devastating impact on the country’s food supply. For our farmers, who we rely on for the food we have on our tables, there is an even heavier burden. There are very few aspects of the farming industry that don’t rely on fuel in some way, and predominantly diesel. So, with the price of diesel set to increase by a hefty R1.20 per litre, food price inflation is something that needs to be planned for and mitigated against.

In whatever way they can, financial institutions need to get into the habit of supporting small-scale farmers.

Food Security in the spotlight

By most accounts, there is a real and present threat to short term food security in South Africa. Weather extremes, fuel price increases, and logistic and transport issues linked to the rail and shipping sectors have compounded challenges to the agricultural sector.

Wandile Sihlobo, Chief Economist at the Agricultural Business Chamber of South Africa, warns that that if the February heatwaves and lack of rain persists, the level of summer grains produced will significantly decrease. In various areas, crucial grains like maize, sunflower seeds, and soybeans are currently in the pollination phase, and ideally March should see increased rainfall to boost overall yields. However, current weather forecasts show a real threat to the country’s food production, and security.

Additionally, the global grain shortage caused by the Ukrainian conflict exacerbates the challenges of ensuring we get food on our tables.

Food scarcity will place an enormous financial burden on SMEs in the agricultural space at a time when they are already struggling to make ends meet. With around 2.5 million small-scale farmers across the country, both they and larger commercial farmers play a pivotal role in the nation’s food security.

This loss of domestic crop yield – and loss of international crop availability – year on year, should be of concern for all sectors of the economy, but perhaps none more so than for SME retailers.

While assistance is needed for farmers to maintain high level of crop production, SME owners whose product supply depends on the agricultural sector must ensure their offerings are secure in case of scarcity.

Being open to diversifying product portfolios, investing in goods with longer shelf lives and fostering strong relationships with suppliers will go some way to mitigating the risk posed by scarcity.

Looking ahead

Something to mention now, but focus more on later are the upcoming elections for 29th May.

Economists agree that the government will continue to walk a tightrope between political aspirations and economic realities in the next three months as we lead up to the elections, so now is the time to make voices heard and expectations clear.

While three months is a long time in business, when viewed in the context of a four-year election cycle, three months is basically next week, and we will all do well to consider a full four-year cycle when deciding on aspirations for the after the election.

This is especially true for the country’s SMEs, who listed political and economic instability as by far their top concern in Xero’s latest (sixth) State of South African Small Business report.

Security, stability, and success must undoubtedly be the outcome we are looking for, but how we get there, supporting the 3 million SMEs that prop up the economy, is something that needs to be considered carefully, and openly planned for.

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