Now Is the Time for Small and Medium Enterprise to Stand Firm
Small business representative organisation AHI says the news that the rating agency, Fitch, has downgraded South Africa's credit rating to sub-investment grade will lead to catastrophically lower economic growth, with some estimating billions of Rands in outflows and a doubling of our current account deficit. In addition we will see more pressure on the rand, significantly higher inflation, and an increased difficulty in servicing government debt.
“It will take us years to recover,” said AHI President Bernard Swanepoel.
Fitch's downgrade to BB+ from BB- on both foreign and local currency debt follows that of S&P Global Ratings which also cut South African foreign debt to "junk" status. The agencies’ move followed the dismissal of finance minister Pravin Gordhan and his deputy Mcebisi Jonas and the resultant perception that this would probably be followed by a change in fiscal and monetary policy.
With two out of three rating agencies downgrading South Africa to junk status, the country is likely to drop of a number global bond indices. This will force international funds which track such indices to sell. Funds and other institutional investors prohibited from holding sub-investment grade securities are also likely to join the exodus out of South African bonds.
The AHI is warning its members that a weaker rand and other factors resulting from the downgrade is almost certain to lead to a rise in the cost of servicing government debt. This will mean less money for critical services such as health, education, housing and sanitation. In particularly fewer infrastructure projects will mean that procurement from SMEs will decline. In the current political climate, an increase in service delivery protests cannot be excluded.
Swanepoel says the downgrade will hit the poorest and the most vulnerable the hardest.
“From a business point of view, it is going to make it difficult to hedge currency exposure and it’s going to make borrowing money more expensive. We will certainly see higher prices in a time where many consumers are already struggling with high levels of debt and input costs are rising.
“It is important to make the point that this ‘own goal’ demonstrates how corruption is more than just the abuse of power for gain. It has real consequences. The coming hardships are caused not by poor business decisions or reckless management, but by a government putting self-interest over national interest. This is government shooting itself in the foot.”
The AHI’s advice to its members is to take precautionary measures where possible to ensure that they, their staff and their businesses are ready and able to survive whatever challenges may come their way in the next few years. The organisation’s conference earlier this week showed that the country’s small and medium businesspeople are a tough and enterprising group. Their communities may need to depend on that resilience for the foreseeable future.
The AHI has been the Big Voice for Small Business for over 75 years.