The entire South African population is on lockdown until May 1st 2020. However, as it stands, there is even uncertainty as to whether May 1st will be the day myself and my fellow South Africans will be able to roam freely, beyond our garden walls.
After discussions with many business leaders, owners and entrepreneurs it seems that South Africans never fail to find optimism in the midst of an uncertain future. It also seems that Covid-19 came at a time when South Africa really needed a helping hand; economic growth, reduced unemployment rates or even cheaper data bundles.
Since January 2020, we have seen the Repo Rate drop 200 Basis Points in an attempt to ease bank lending and reduce the imminent stress on individual credit. Not only this, but Moody’s downgraded us to “Junk” status which has significantly reduced the likelihood of international investment for the foreseeable future.
The result of Moody’s will inadvertently lead to the following, as stated by Sanisha Packirisamy, an economist at Momentum:
- Higher borrowing costs for the Government will crowd out spending on much-needed social and economic programmes.
- A further knock to business sentiment could lead to lower rates of fixed investment, weaker growth and increased downward pressure on employment.
- A more depreciated currency leads to a higher cost of imported goods, which could raise inflation and limit the extent to which the SA Reserve Bank can react to the Covid-19 crisis.
For context, the Repo Rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds. The Repo Rate is also used by monetary authorities to control inflation, which stands at 5,17%. Not only this, but the Rand to Dollar currency exchange is currently R18.67 to $1, with a high of 19.293 ZAR on 05 Apr 2020. A devaluing currency, mixed with an increased inflation rate and ‘junk’ status is not a positive position to be in from Q1 into Q2 of 2020 for South Africa.
So, What Does This Mean for a Business Owner?
Well, cheaper lending rates allow for business owners to leverage their debt at a cheaper rate, meaning that debt can be serviced at a decreased cost. On the other side of the coin, however, interest rates for savers and investors has also taken a considerable knock, reducing the lending risk but also reducing the interest opportunity on savings and investments for individuals.
At this point, the uncertainty for businesses in the near future has lead to many, if not all, business owners preserving their cash to ensure they can survive the storm. As we have seen across the globe, large corporations are asking the Government for bailouts, due to this unforeseen event. Initially, one would assume that these large businesses, who are seeking Government Funding, are not properly managed and maintained.
You might ask yourself why a company which generates in excess of $100,000,000 in annual revenue has the audacity to seek any form of funding?
Well, I had the same thoughts. However, after some analysis the reason is simple.
Most companies leverage their equity and debt, ensuring they have a healthy balance between leveraged debt and assets. Assets, in this case, will most probably be illiquid, meaning these companies have no short-term way of turning these illiquid assets into liquid assets or better; cash on hand. Illiquid assets (infrastructure) could comprise of property, long-term investments or tied up cash in entities such as a Trust, which cannot simply be accessed freely.
As a business owner, most will find ways to secure their cash. In this case, the term “never keep your eggs in one basket” seems to stand true, as there is a high risk associated with your money falling into only one of the above if your money has not been “hedged” to protect you. Hedging your money allows you to ensure that you are always ahead of the game.
Most business owners, especially at this time, want to mitigate risk, or have planned, in advance, to mitigate their risks. It also goes without saying that most companies carry a high expense sheet, where they have to pay their respective debts as well as costs to company, such as employee salaries.
With all this to account for, it is fair to say that right now we are in an interesting phase in our economy. We all look to our President as our knight in shining armour, and it definitely goes without saying that Cyril Ramaphosa has a difficult job on his hands.
- Does he save lives, continue social distancing and potentially destroy our economy?
- Does he save the economy, which may result in mass deaths across South Africa?
The reality is, decisions like this cannot be taken lightly, as the knock on effect could result in severe economic pressure, turmoil or worse.
Looking Forward
At this point, it is fair to say that “cash really is king” and business owners who are leveraging their cash, will ensure their longevity in business. With the focus on community driven help, growth and an overall optimistic outlook on economic development, many people and business owners are working together to curve the problems we currently face.
In some cases, business owners are having to explore their business models and adapt them as they see fit. Right now, the digital revolution seems a greater fit than ever before. Being able to service a client from a distance gives any business the upper-hand when social distancing is imposed, meaning that digital businesses could be less of the future and more of the now.
For example, Zoom Inc, a digital business which allows people to dial in and have a conference call has considerably grown since the pandemic. Daily downloads of the Zoom app have increased 30x year-over-year and the app has been the top free app for iPhones in the United States since March 18, according to Bernstein Research and Apptopia. Zoom said daily users spiked to 200 million in March, up from 10 million in December.
After conducting further research on the effects of Covid-19, I was able to explore a variety of statistics which could help verify the effect of the virus on economies such as South Africa.
Below are some interesting statistics from Econsultancy which really depict the problems faced in the UK by organisations:
- Only 14% of UK marketing campaigns are now continuing ‘as planned’ (assuming that most marketing campaigns are traditional).
- 85% of organisations have claimed that they are delaying or reviewing new hires, and an even larger 90% are doing the same with their budgeting commitments, rising sharply from 41% and 61% respectively.
- As many as 69% of UK organisations are experiencing a drop in demand for their products and services.
- This figure increases to 77% for SMEs with annual revenue of less than £50m, compared to 64% of big businesses.
- March was the busiest month on record for UK supermarkets, seeing a 20.6% rise in sales.
It is evident that there has been a global effect since Covid-19 has infiltrated our communities, and it is imperative to be mindful that we are not clear of the storm as yet.
As South Africa has seemed to follow the suit of the rest of the world, we find ourselves lagging behind other countries in handling the pandemic. If we see increased rates of sickness and death, with the likelihood of further spreading of the virus, we will most probably find an extension of the lockdown period. This seems like a logical assumption, in light of Cyril’s recent address to the Nation.
In this current climate, it would seem that although many problems are being presented, there are also an abundance of opportunities for businesses to leverage upon. By ensuring that your cash is protected and guaranteed, you ensure the safe keeping of your currency at a time of instability and uncertainty. Furthermore, this not only protects your money, but yourself, your business and your family.
Now, more than ever, businesses and business owners need the help of the Government, other business owners and banks, to offer assistance in this time of need.
It is, without a doubt, a scary time for everyone. The uncertainty leaves a bitter taste in everyone’s mouth as we are really unsure of what the future holds for us in every sphere imaginable. It seems for now, working from home as become the new norm.
One thing is for sure, though.
Nothing seems to break the South African spirit. From conference calls to online articles, social media to discussions with business owners, everyone seems to be looking forward to a better and more fruitful South Africa.
Right now, it seems that positivity and optimism could carry us through this, as long as we have the support of our Government, countrymen and women, and the large corporations who have major influences within the economy.
I learned that courage was not the absence of fear, but the triumph over it. — Nelson Mandela
Please note the following:
- The views are are my own and not the views of Investec Bank
- These opinions are my own; supported by my own perspective, knowledge and education.
