Alarm bells for one of South Africa’s most important employers
The South African Reserve Bank (SARB) is only likely to cut interest rates in the second half of the year, putting severe strain on small and midsize enterprises (SMEs).
Last week, the South African Reserve Bank kept the repo rate at 8.25%, the same figure as May 2023. Although the halt prevents an increase in borrowing and debt costs, it still remains high, with most economists only expecting a cut halfway through the year.
This means businesses, and small businesses in particular, will continue to face immense pressure as the Reserve Bank’s policy rates sit squarely in restrictive territory for longer.
According to digital banking group, TymeBank, this spells trouble for the wider economy as SMEs are a big employer in the country and have already faced years of harrowing conditions.
“We know that a key reason for high interest rates is to control inflation. We urge the South African Government to examine the factors that cause our high inflation rate and implement measures to alleviate the problem where possible so we can see a future reduction in interest rates,” said Miguel da Silva, Managing Executive of Retail Capital, a division of TymeBank.
“South Africa’s SMEs are vital to our economy. These businesses have shown incredible resilience in navigating the challenges posed over the past few years, but they need relief. When our SMEs are doing well, our economy does well.”
The SME sector is a primary job creator and a major economic driver, but constant high interest rates put it in a challenging position, Da Silva said.
Pain points
The high interest rates mean that the cost of doing business remains high, with servicing various types of debt, such as property bonds, bank loans, credit cards and other credit instruments, remaining expensive.
Long periods of high interest rates result in considerable strain on the profitability of SMEs, prompting a shift towards debt restructuring and other financing solutions.
In addition, leverage, which is key to a business’s operational success requires obtaining finance at a lower rate to fund operational profit at a higher rate. The higher interest rates have damaged this benefit.
However, with interest rates expected to decline as inflation does, leveraging could soon be used again as a business tool in South Africa.
High interest rates also affect consumer spending, as the cost of personal debt increases. This impacts the bottom line of businesses providing goods and services.
In a tough economic environment, businesses will have to lower prices to retain customers, which is challenging to do when business costs are going up in real terms.
This can cause unwanted practices such as shrinkflation, where the weight, units, or volume of a product decreases while the price stays the same.
Furthermore, the ability to invest in equipment, improved processes, or new staff is limited by constant high interest rates.
Businesses are thus forced to extend the lifespan of existing equipment and find new ways to reduce maintenance costs. There could also be delays in non-essential work until economic conditions improve.
Finally, cash flow becomes restricted with higher interest rates. Operational expenses that rely on positive cash flow, such as payroll, inventory, inventory maintenance, and consumables, face increased pressure, affecting the ability of a business to sustain itself and remain profitable.
“It is always easier to say than do, but my advice to SMEs is to hold on at all costs,” said Da Silva. “Expectations are that interest rates will come down.
“Be upfront with suppliers and work out revised payment schedules. The suppliers you work with are usually in the same boat, and they know that interest rates must come down, and it is in their interest to help keep customers going until things improve.”
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