A call to help South Africa’s 525,000 small businesses

Apr 20, 2020

The 35-day lockdown period to curb the spread of the Covid-19 coronavirus, will have a major impact on the 525,000 small, medium and micro-sized enterprises (SMMEs) in South Africa, putting 6.6 million jobs at risk.

This is according to Adrian Gore, a member of the CEO Initiative, chairman of the SA SME Fund, and chief executive officer of Discovery, who said: “Given the lockdown, the vast majority are unable to pay their rent, utilities, and importantly, their employees.

“Initial surveys indicate that 60% of SMEs are either considering retrenching employees, or already have. This is a significant threat to the SA economy, with many millions of jobs at risk.”

The CEO Initiative, which was established in 2016 as a collaboration between government and business to address some of the most pressing challenges to the country’s economic growth, is supporting the call of Business for SA (BSA) for all large companies to pay their SME creditors by Monday 20 April 2020.

Sim Tshabalala, a member of the CEO Initiative, and chief executive officer of Standard Bank, said: “These are extraordinary times that require extraordinary commitment from CEOs and large corporates. The Government has asked South Africans to stay home under a 35-day lockdown. This is tough for every individual, and every business, but most especially difficult for small and
medium enterprises.”

“They are under enormous strain and we are already seeing many businesses having to close their doors, which has a significant impact on their ability to sustain their employees.

“Even outside of the lockdown, many of these businesses often do not have the cash flow needed in order to maintain sustainability. We believe early payment is the right thing to do and will have a significant impact on their ability to survive and keep paying their employees.”

University of Stellenbosch Business School (USB) visiting lecturer in corporate finance, Brett Hamilton, said the Covid-19 pandemic will lead to business failures, with the SA Reserve Bank estimating an additional 1,600 business insolvencies this year, while the “fattest” – those with the strongest cash reserves – will likely survive.

“We find ourselves in one of the most uncertain periods of human history. It is blurring the lines between business, government and society. Policymakers are confronted with an unprecedented, and impossible, trade-off between public health and economic growth.

“Given the speed and uncertainty under which these complex decisions are made, we have seen unprecedented actions from governments, central banks and businesses. In many cases, governments have overstepped their usual political and ideological boundaries and business has somewhat embraced stakeholders over shareholders.

“Fighting the spread of the coronavirus requires ‘big government’ and ‘business with a heart’ to work together – it may be expected and the right thing to do in a crisis, but the question is if these roles will remain after the pandemic,” he said.

Hamilton, a director at First River Capital, said cashflow is “the lifeblood of any organisation” but lockdown has severely restricted businesses’ ability to generate cash through operations, while accessing cash through debt or equity investment are limited in the current economic climate, and possibly unwise.

The latest downgrade by Moody’s of South Africa’s credit rating to sub-investment grade severely restricts the country’s access to debt and has seen a spike in the cost of debt, he said, noting that the South African 10-year government bond yield reached a maximum of 12.36% on 24 March compared with a low of 7.9% in 2018.

“So, debt may do more harm than good during these times, even with the debt relief pledges made by banks,” he said.

This leaves “Alpha companies” – large, mature and cash-flush – in prime position to weather the storm, buy out their competitors and continue to invest for growth after the pandemic, he said.

“Markets will become more concentrated and the position of incumbents more entrenched. The business world will look different after the pandemic and it will most likely fall on governments to regulate the new ‘Alphas’ to ensure better competition.

“If it should do so and how it should be achieved remains to be seen,” he said.

Hamilton noted that during the pandemic we have seen many companies shift to a more socialist stance, offering free products, expertise and financial aid to their employees and to other virus-related efforts.

Is this perhaps the dawn of a new social contract?

Hamilton pointed to a 2017 report funded by the South Africa Department of Trade and Industry and published by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development which held that South African companies were accumulating reserves as opposed to investing it in the economy and, thus, stimulating economic growth.

The report noted that between 2005 and 2016, the cash reserves of the top 50 companies on the JSE increased from R242 billion to R1.4 trillion and called for policy intervention from government to stimulate domestic investment by these companies and put an end to the “investment strike”.

He said that while there were counter-arguments to this – that “cash hoarding” was a myth and merely a reflection of the business environment at the time – if government policy had been used then to force South African companies to spend their cash holdings, fewer would now be in a position to weather the current storm.

“This could support the view for lower government involvement in business and the protection of the free market. That being said, government intervention during the pandemic has not only been welcomed by many, but in most cases has been expected.

“Similar to the financial crisis of 2008/9, governments have moved to act to protect the free market, but in many countries the interventions for the coronavirus have been more radical.

“Putting a freeze on the free market by way of lockdown is counter to the political and economic ideologies of many countries, but they have acted nonetheless,” he said.

Hamilton said that government intervention should also focus on the ability of the economy to recover after lockdown has lifted – “to ensure that enough businesses remain standing and that people are employed through the crisis to quicken the pace of recovery after the pandemic”.

“What is required is the ability for companies to maintain payroll, gain access to debt financing and for central banks to provide the latitude for banks to reschedule loans (possibly with forbearance through credit guarantees).

For this, governments must pull out all stops in terms of fiscal action,” Hamilton said.

With South Africa’s “limited fiscal latitude”, external finance would be required and should be accessed from as many sources as possible, including bonds, accessing the capital market, as well as a reliance on development banks such as the IMF.

 

Culled from 

  1. Opinions and Analysis

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