26 January 2023: The South African Reserve Bank (SARBs) Monetary Policy Committee announced its first rate hike for 2023 today with a 25 basis point increase, which will be implemented from 26 January onwards.
The SARB last hiked rates back in November 2022 by 75 basis points bringing the repo rate to 7% and the prime lending rate to 10.5%. The latest hike means the repo rate stands at 7.25% and the prime rate goes up to 10.75%.
Miguel Da Silva, managing director at Retail Capital, says: “This means more pain for an overburdened small medium enterprise (SME) sector. The timing simply couldn’t be worse. Since the last repo rate hike in November the operating environment has worsened thanks to load shedding which is now at stage 6 in most provinces.
“This has had a major negative impact during the festive season where most small businesses typically make their profits for the year. It’s resulted in them not being able to fully trade during the peak period and this has been very detrimental. It’s resulted in some business owners being forced to shut their doors.”
This 0.25% rate hike comes at a time when Retail Capital is seeing more businesses flounder in a high inflationary environment. “SMEs are stuck between a rock and a hard place as they can’t just hike their prices to accommodate for this because of the very real risk that their customers will just stop buying their goods.”
“Consumers are already squeezed, and the latest rate hike will mean there’s even less money in their pockets – particularly those servicing expensive debts like home loans. It has resulted in a very difficult operating environment for SMEs – it’s all about survival now,” says Da Silva.
Economists were split on their predictions for the latest hike. Earlier this week, BNP Paribas chief economist Jeff Shultz said the SARB will likely increase rates by 50bps while economists at Nedbank predicted the rate to increase by 25bps today.
Rates are likely to increase further if inflation isn’t kept under control. Reserve Bank governor Lesetja Kganyago has been quoted as saying that he will continue to use rate hikes as a tool to contain inflation. With no end in sight to inflationary pressures this is set to place even more pressure on SMEs, particularly those operating on the red line.
Alternative lines of credit are available to SMEs through digital funders to help them keep afloat, but Da Silva urges all SMEs to first conduct a detailed cash flow analysis, which studies every inflow and outflow before they consider borrowing money – particularly if they are already have other forms of debt attached to the business.
“Every expense needs to be carefully analysed and an evaluation needs to be conducted on whether the business is using the right suppliers. Once you have that foundation you have the tools to make the right calls,” says Da Silva.
He also suggests streamlining the business to focus on goods and services that are optimising the most profit. “If you have a product or service that is not making any money you should consider discontinuing it. Surviving in this environment is all about good cash flow management,” said Da Silva.
While credit can offer some short-term relief, Da Silva believes that government can do more to rescue SMEs in this tough, high-inflationary environment where consumers are tightening their belts. Besides high inflation, loadshedding has been the biggest ‘killer’ on business activity and therefore he believes government has the responsibility to do more.
“I know that the Minister of the Department of Small Business Development, Stella Ndabeni-Abrahams, is currently in discussions the government’s agencies to offer an energy relief package. It’s good that government recognises the plight of SMEs and is trying to hammer out a plan to help them survive. The problem with this type of support is that the execution of it can take time.
“Tax breaks or tax incentives could be a better to way to offer interim relief. It’s something tangible that would make an immediate difference. Bounce back loans are good in principle, but they never really got off the ground,” concludes Da Silva.