Dark clouds gather for businesses in South Africa
Businesses in South Africa are pessimistic, with 81% of executives, leaders, and professionals having a gloomy outlook for South African growth and business resources, according to the latest Deloitte Restructuring Survey.
The survey was conducted in January and February, with over 150 lawyers, C-suite executives, lenders and business rescue practitioners in South Africa, Kenya, and Nigeria participating.
Deloitte Africa’s Turnaround & Restructuring Leader, Jo Mitchell-Marais said that “last year’s survey was conducted at a time of rising optimism across the globe: we were finally free of draconian lockdowns, the commodity prices on which so many of our economies rely were booming, and the prospect of war in Ukraine seemed remote. What a difference a year makes.”
84% of lenders in South Africa are pessimistic about growth, an increase from 69% last year.
In addition, pessimism among executives is up from 33% last year to 75%.
Unsurprisingly, load shedding has been mentioned as a key factor limiting growth, with 150 days of load shedding recorded in 2022 and a bleak outlook for the rest of 2023.
South Africa warned of load shedding ‘beyond stage 6’ as winter approaches
Gloomy outlook
Deloitte said that South Africa, like much of the world, is now caught in a rising interest rate cycle, with inflation hurting and exchange rates falling.
“South Africa is battling through the greatest threat to economic growth the country has experienced in its young democracy: load shedding. Furthermore, the recent grey listing and the magnitude of the implications and consequences – while yet unknown – could not have come at a worse time,” Mitchell-Marais said.
The report highlighted the cost of living crisis, with the survey’s results showing that retail and consumer products sectors are at the greatest risk due to consumers having less money.
Identity crisis
Deloitte said that business rescue was introduced with the 2008 amendment of the Companies Act, however, opinion on it remains divided on whether it has been a success.
80% of respondents defined the main purpose of business rescue as “doing what it says on the tin” or simply returning the company to normal trading (Part A) or getting a better return to creditors and liquidators (Part B).
Survey participants said the success rate of businesses rescue, via Part A or B, is lower than half.
Only 3% of lender respondents said that business rescue was successful in more than 50% of their portfolios if Part A was used as a standard.
Whereas 39% of lender respondents said that they experienced business rescue success in more than half of their portfolios if Part B was used instead.
Deloitte said that business rescue may be experiencing an ‘identity crisis’ as it achieves more success in winding down a business but is supposed to return a company to normal trading.
One restructuring lender at a development finance institution said that “business rescue is step one towards liquidation”.
Informal restructuring
Deloitte added that formal restructuring mechanisms are being used in contexts for which they are not designed in South Africa, with respondents saying that informal restructuring methods are most likely to save a company.
However, informal restructuring mechanisms need time and stakeholder buy-in to succeed.
The report said that intervention needs to occur months or years earlier by tracking indicators of financial distress for a successful result.
“Our survey respondents highlight two critical success factors: competence and high-quality, reliable financial information. These two points reinforce each other. When lenders are presented with numbers and a narrative that can stand up to scrutiny, their estimation of the management team’s competence rises,” Mitchell-Marais added.
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