South Africa : Triple blow hits businesses in South Africa

  • 21 July 2022 / News / 440 / Fares RAHAHLIA


South Africa : Triple blow hits businesses in South Africa

As interest rates increase to curb rising inflation, coupled with fuel and load shedding, among other challenges – is putting pressure on the profit margins of small businesses in South Africa, says Andiswa Bata, co-head of SME at FNB.

“The past few months haven’t been easy for small businesses as fuel increases have significantly increased the cost of transporting goods. Moreover, load shedding has resulted in some businesses losing revenue due to non-operation while having to spend more on diesel for backup generators,” she said.

Bata said SMEs have shown resilience by absorbing costs in the short term, but the rising pace of inflation may lead to unstable operating models, leaving some businesses with no choice but to pass on some of these costs to consumers – who are regrettably also struggling to make ends meet.

“At the same time, we are likely going to see employees pleading for higher wages as their household budgets struggle to keep up with rising food prices,” she said.


Inflation 

Data from StatsSA on Wednesday (20 July) showed consumer inflation accelerated to the highest rate in over a decade.

Headline inflation was 7.4% y/y in June, up from 6.5% in May, and was at its highest since 2009. “This outcome was slightly below our expectation of 7.5% but above the consensus expectation of 7.3%. Headline inflation accelerated by 1.1% m/m, with fuel contributing 0.5ppt, core adding 0.4ppt and food adding another 0.2ppt,” said FNB  economist Koketso Mano.

Core inflation lifted from 4.1% y/y previously to 4.4% and had monthly pressure of 0.6%. There were meaningful contributions from housing (up 1.0% m/m, 2.9% y/y and contributed 0.2ppt), public transport (4.3%, 14.3% and added 0.1ppt), household contents (1.2%, 4.7% and added a further 0.1ppt), said the economist.

Fuel inflation increased by 9.4% m/m and 45.3% y/y, explained by the over R2 per litre increase in petrol prices and over R1 per litre increase in diesel prices in June, said FNB.

Food and non-alcoholic beverages (NAB) inflation continued to accelerate, posting 1.2% m/m and 8.6% y/y. Cereals and meat inflation again provided the most upward pressure to the monthly gains (0.5ppt and 0.3ppt respectively), while dairy and eggs, as well as oils and fats, added around 0.2ppt each, the financial services firm said.

Higher food inflation has driven the inflation for low-income households to 9.1%, said Mano.


Fuel 

Fuel has been one of the single biggest contributors to South Africa’s rising inflation costs, with motorists paying between R205 to R366 more per tank of petrol than they were in January.

However, motorists could see some reprieve in August, the Bureau for Economic Research (BER) said in a research note this week.

“Despite the sharply weaker rand of late, the over-recovery on the petrol price so far in July is sitting at an average of well above R1 for all grades of petrol.

“If the notable over recovery is sustained through the rest of the month, it would more than nullify the 75c rise in the petrol price due to the end of the temporary fuel levy relief at the start of August. This will provide consumers with some reprieve at the petrol pumps.”


Load shedding

Eskom poses a significant risk to South Africa’s economy and public finances, with the government guaranteeing as much as R350 billion of its debt.

The utility has been intermittently cutting 6,000 megawatts from the grid since last month, leaving the country in darkness for hours at a time and further constraining industrial output and growth.

This week the power utility again warned that load shedding would continue for the foreseeable future until it can secure additional generation capacity. Eskom said it needs an additional 4,000MW – 6,000MW added to the grid, with no timeframe set for when the power outages will end.

The power utility has also reportedly asked the National Energy Regulator of South Africa (Nersa) for a 32.66% price hike. And, if Eskom is granted the exorbitant increase from Nersa, it will reportedly request an additional 10% increase the following year.

Eskom requested a 20.5% increase in tariffs for 2022-23 towards the end of last year, however, Nersa granted an increase of 9.61%.


Bata detailed five simple strategies that SMEs can consider in managing these mounting pressures:

  • Every cent counts. So, use the stuff your business can access for free, e.g. low/zero monthly fee bank accounts, speed point devices with no upfront purchase cost or monthly rental fee, free accounting and payroll solutions that save you money and time.
  • Given the costly impact of an interest rate hiking cycle on the ability of small businesses to borrow and service their debt, they stand to benefit from the Bounce Back Loan Scheme which is currently available to businesses at a more favourable interest rate than what most may be able to access funding at elsewhere.
  • Eliminate any unnecessary vulnerabilities by cutting non-essentials, streamlining business processes, sharing costs with other businesses (e.g., truck hire for deliveries) where possible, reduce redundant physical space you are occupying  – especially if your business has a strong online/digital presence and your staff are working from home.
  • Understand the direct costs that go into producing your business’ products and services. This helps to determine if the business can continue to make a profit in the event of rising input costs. Know how much pressure your profit margins can take and push back where you can, to help you stay competitive.
  •  The upfront cost may seem high, but there has never been a better time to pursue a green energy solution like solar. It will lower your future monthly electricity costs, and limit downtime from load shedding, not to mention the added benefit of protecting the environment.

“There’s no doubt that inflation, fuel and load shedding will continue putting significant pressure on the bottom line of SMEs. However, there are steps businesses can take that will make a big difference on how SMEs will emerge from the current tough economic conditions,” Bata said.



source: businesstech

See too