The recent downgrade of South Africa’s sovereign credit rating to junk status by Standard and Poor’s (S&P) and Fitch means that lending and seeking loans will become more costly for both local consumers and businesses, as interest rates and costs rise to adapt to this new volatile economic environment, an expert warned last week.
Local small and medium enterprises (SMEs) will feel the ripple effects from the increased burden placed on domestic banks, including their ability to service foreign currency obligations, as a result of the recent downgrades, Mark Paper, Business Partners International CEO, said.
“The South African banks are directly impacted by the sovereign credit rating and as a result of the downgrade to junk status, S&P also downgraded South African banks to junk status,” Paper explained.
“Thus an increase in borrowing costs by the domestic banks will, over time, put pressure on shareholder return. In order to bolster this return, banks will be forced to increase the cost of funds while reducing operating expenses – both impacting on the South African SME ability to obtain and service loans.”
Furthermore, he said, these factors can be expected to have a ripple-effect for consumers, who in light of increased interest rates, and rising prices, will have less disposable income.
“These are all factors that influence the health of a small business’ cash flow at the end of the day,” Paper pointed out.
While investing in South Africa is deemed to be riskier than it was a week ago, he however said this shouldn’t deter SMEs from investing in their business and contributing to the country’s economic recovery.
“While faced with these uncertain times, it doesn’t mean that SMEs should suspend activity, or stop moving forward. Borrowing money, in good or bad times, can make a lot of business sense for well-managed companies.”
He stressed that in these uncertain times, there were several factors to consider when managing existing debt or seeking new funding.
“SMEs need to ensure that they understand the funding options that exist, as well as what type of funding is best suited to their needs.
“These could be it equity, long-term debt for fixed assets or shorter-term working capital – as this will determine who to approach, the term and price to pay, and what impact this will have on the business’ cash flow.”