Being a business owner or entrepreneur means that you are contributing to the economy differently than just being a consumer. You are participating in activities that grow the economy, like job creation, value addition and increased innovation. Therefore, they need to understand the two branches of economics, because this is what affects decisions and has to do with factors such as inflation, labour laws, and exchange rates.
The two branches of economics are microeconomics and macroeconomics.
Microeconomics is the smaller lens that looks at how individual businesses make decisions, such as their response to supply and demand.
Macroeconomics is the bigger window. It includes factors like inflation, national regulations and the country’s GDP.
The way businesses respond on the micro-level is closely related to, and often determined by, the macro-level. This is why entrepreneurs still tune in to find out what the interest rate update is every 90 days, even if it remains unchanged.
A Quick Update On Inflation and Interest Rates
“Inflation increased to 5% in June, up from 4,5% in May, according to Stats SA. Given the threshold for the Reserve Bank being at 3% for inflation and knowing their proactive approach to dealing with inflation, an increase in rates was initially expected,” says Brendan Jacobs, of Business and Commercial Banking, Standard Bank South Africa. “As a result, the decision to keep rates stable is welcome relief for businesses.”
It was reported that keeping the interest rate unchanged was not a unanimous decision; two members encouraged a 25-basis-Point hike. In the end, the decision that protects the economy long-term was made.
“The split vote by the SARB Monetary Policy Committee highlights the delicate balancing act between taming inflation and supporting a fragile economy in light of geopolitical shocks and oil price volatility,” Jacobs unpacks. “A stable repo rate keeps inflation anchored by prioritising price stability and protection of the rand as per the SARB’s price stability mandate. Low interest rates boost the purchasing power of consumers, reduce uncertainty around debt servicing, and tame food price shocks.”
A hike would have added further strain on consumers and business investment amid pressures from high fuel prices. “However, the SARB flagged that if oil-driven price pressures persist, keeping the rate constant could lead to unanchored inflation expectations, which spill over into slow economic growth from weakened foreign investment and constrained consumer spending,” he adds.
A Sigh of Relief for Agribusinesses
One sector in particular is relieved about the pressure that this stability is currently providing, namely the agricultural sector.
Jacobs explains that after the increase in May, a further increase now would accentuate pressure on agribusinesses in particular, who already face pressures from rising input costs and transport.
“The ongoing conflict in the Middle East remains a challenge, though for agribusinesses, given our dependence on key import dependencies such as fertiliser and diesel from there. The decision at least prevents higher interest rates for those with debt that would further increase their cost base,” he explains.
He adds that challenging periods in agriculture in recent years have all created volatility in the industry. However, the common theme is that the agribusiness sector has endured a prolonged cost-price squeeze phenomenon. “Commodity prices have fallen while costs have generally remained elevated. Therefore, the primary pressure is on cash flow. In practice, this means that there is less free cash for farmers, greater pressure on operating facilities and more pressure on working capital.”
However, not all agricultural industries are under the same pressure. “Historical trends provide valuable insight, but success in the next cycle will depend on producers’ ability to understand and respond to an increasingly complex operating environment.
“Macroeconomic pressures, geopolitical developments, exchange rate volatility, global grain markets, and local consumer trends are all aspects outside the control of the producer, and they all influence profitability in ways that require careful interpretation and proactive decision-making.”
Switching to Survival Mode
High interest rates increase borrowing and operating loan costs for farmers, squeeze profit margins, and discourage long-term investments in land and machinery. “Because agriculture is a capital-intensive sector, expensive debt directly reduces farm cash flow and can slow down overall production expansion,” Jacobs says. But there is hope. “Farmers can manage high interest rates by applying to have their existing debt restructured into longer repayment terms, optimise operational cash flow by cutting unnecessary input costs, lease rather than buy expensive machinery, and communicate proactively with lenders before payment issues arise,” Jacobs recommends.
To cut unnecessary costs, farmers are encouraged to use precision farming techniques that only apply inputs specifically where and when they are needed. Climate-smart techniques such as minimum tillage, cover cropping, and mulching are also encouraged because, over the long term, they reduce land preparation, fertiliser, and crop protection costs. Improved soil health also supports plant health and improves average yields.
Not Limited to Agriculture
The decision to keep interest rates unchanged certainly provides some breathing room, not only for agriculture but also for several sectors that are closely linked to the agricultural value chain. “If we look beyond the farm gate, sectors such as food processing and manufacturing, transport and logistics, and agricultural machinery and equipment, as well as wholesale and retail, should benefit from greater stability in borrowing costs,” he elaborates. “These sectors are integral to the agricultural value chain, as farmers rely on transporters to move produce, processors and packhouses to prepare products for market, machinery and equipment suppliers to support production, and retailers to connect products with consumers.
“While borrowing costs have not become cheaper, the decision to leave interest rates unchanged provides a degree of stability for businesses as they plan investments, manage cash flow, and make operational decisions for the remainder of the year,” Jacobs concludes.
