SMEs are likely to feel the impact of South Africa’s recent downgrade to ‘junk’ status.
It is expected that the cost of doing business will increase as the compounding effects of the downgrade, including interest hikes, increased pressure on the rand and rising inflation will further stretch SMEs‘ already strained budgets.
SMEs with loans linked to the prime lending rate will have to pay more to service their debt, and those with business property bonds will now pay higher monthly installments. The downgrade will also likely lead to a decline in procurement from small businesses as government slows infrastructure spending, according to a Fin24 article.
One of the consequences that SMEs should not overlook is how the downgrade will affect consumers and how spending trends will be affected.
How we got here
Helping to demystify the downgrade and its impact on the economy and businesses is Chris Gilmour, investment analyst at Absa Wealth and Investment Management.
Ratings agency, S&P Global, last week cut the country’s sovereign debt to below investment grade, with Fitch announcing its downgrade of South Africa soon afterwards. As a result South Africa received the much-feared junk status rating. Moody’s, which has yet to announce its rating, has placed the country on review for a downgrade according to a TimesLive article.
The agencies rate countries or corporates‘ ability to repay their debt, Gilmour explains in an article on The Small Business Site. The downgrade, Gilmour says, is based on a range of variables such as economic performance, unemployment rates and inflation – the recent cabinet reshuffle being one of the key factors in the country’s downgrading.
With this in mind, as a business owner, what are some of the important factors that will affect your customers?
Here are 4 major effects of the junk status downgrade you should know that Gilmour says are likely to affect the customer that will in turn affect your business.
1. Interest Rates
Interest rates are likely to rise as a result of the downgrade, Gilmour says. This will result in an increase in the monthly cost of debt including home loans, vehicle-finance, credit cards and other repayments, which will put further strain on consumers’ individual disposable income, he adds.
For example, an individual with a mortgage bond of R1 million, paying it over 20 years, is currently paying R9 984 at an interest of 10.5%. An increase in interest rates to 13.5%, will increase their repayment by R2 090 to R12 074, Gilmour explains.
2. Jobs at risk
The economic fallout of the downgrade will see SMEs having to tighten their belts. One of the consequences of this could be the shedding of jobs, explains FNB economist Mamello Matikinca in an article on Fin24.
In an environment where doing business becomes tougher, businesses will be less likely to hire more staff and may even have to cut down on the number of employees on the payroll to ease spending.
Economists predict the downgrade will have an “adverse” impact on both the rand and inflation, with Christie Viljoen, senior economist at KPMG saying in an interview with Business Tech that it will result in “an outflow of investment funds from bonds and equities” as many local and international investment funds withdraw from the country.
“This in turn will adversely affect the value of the rand, increase the cost of imports, and keep inflation elevated for longer. The South African Reserve Bank (SARB) would have to adjust its monetary policy stance accordingly,” she says.
The devaluing of the currency will further drive up the cost of petrol and imported food, according to an article by News24. This will mean that transport and food will increase further, putting further pressure on the consumer’s household finances and the country’s inflation.
4. Consumer confidence
With the increasing interest rates and higher inflation, consumer confidence about the state of the economy will also suffer, resulting in lower spending, according to Fin24.
Low levels of consumer confidence mean consumers expect South Africa’s economic to deteriorate further and that they believe it is not a good time to buy durable goods. Lower spending will in turn place more pressure on economic growth.