News Room

How Hard Will Junk Status Hit Small Businesses?

Author: Megan Ellis
Date: 2017-06-05
We know junk status will affect small businesses, but how big will the impact be? We investigate the situation and offer tips for owners...
The question is no longer whether junk status will affect SMMEs, but rather how hard it will hit these small businesses. While it has only been a few months since South Africa's credit rating was downgraded by two global agencies, effects have already been felt across the economy. They will be seeing interest rate hikes, insurance premium increases and a tougher job market. While General Motors has denied that junk status played a role in their exit from South Africa, there are those who still blame the downgrade for the divestment. But what does the downgrade mean for small to medium businesses? CompareGuru looks at what analysts have to say and their tips for survival…

'Years To Recover'

AHI, a group representing small businesses in South Africa, hasn't sugar-coated what they feel the effects of junk status will be on SMMEs.
"It will take us years to recover," AHI President Bernard Swanepoel said in a statement after the downgrade. "From a business point of view, it is going to make it difficult to hedge currency exposure and it’s going to make borrowing money more expensive. We will certainly see higher prices in a time where many consumers are already struggling with high levels of debt and input costs are rising," he added.
With the lending rate set to rise, small companies will see their existing loans increase. As a result, they will have to manage their debt more carefully. For companies relying on imports, the cost of foreign products has increased. Consumers' wallets are also more strained, meaning that they will be weighing up any purchases they make. This can also affect small businesses, who don't have the same buying power as large corporations. Due to this lack of buying power, small businesses can’t always offer the best deals. And as the SA Consumer Satisfaction Index (SAcsi)'s recent report on supermarkets pointed out, a tough economy results in less consumer loyalty. This means that consumers will follow the best deal available, rather than paying more to support a company they like.
"The coming hardships are caused not by poor business decisions or reckless management, but by a government putting self-interest over national interest. This is government shooting itself in the foot," Swanepoel said.
Possibly some of the worst news for businesses, however, is that an upgrade back to investment status could take years. The AHI added that Nedbank analyst Reezwana Sumad noted that it takes an average of five years to get back to investment grade.  
Read More About How Junk Status Will Affect Your Premium Below

The Divestment Problem

Another challenge facing SMMEs as a result of junk status is the risk of divestment from large companies. Global companies leaving South Africa will definitely hit our fragile job market and the economy. However, it will also affect hit small businesses. While people might assume that large companies will leave a gap that smaller ones can fill, these exits usually cause strain on small businesses' budgets. This is because large companies create a value supply chain. This chain helps support many small businesses. For example, Numsa predicted that GM's exit from South Africa would cause over 1 000 job losses. This is despite GM only laying off 600 staff. The reason is that smaller companies who supplied services to GM will lose the income from this large client. This results in the need to retrench employees. While GM states the downgrade didn't weigh in on their decision, it will be a consideration for other companies weighing up the value of their investments in South Africa.

What Can SMMEs Do?

The discourse around junk status's implications for SMMEs does seem to spell doom and gloom. However, there are steps that small business can take to protect themselves. The AHI urges small companies to take precautionary measures for the coming years to ensure their survival. Meanwhile, Mark Paper, COO of Business Partners International, has said that SMMEs are already adapting to junk status.
"While faced with these uncertain times, it doesn’t mean that SMEs should suspend activity, or stop moving forward," he said in a statement.
Paper notes that small business won't have to stop taking out debt altogether. But they must be more vigilant in the management of their loans. He says that business owners should consult financiers and also extensively research funding options. He suggests that small companies should also review their business plans in light of a tougher economy. This includes cutting down on unnecessary spending. The AHI also announced that it will be calling on the new Finance Minister Malusi Gigaba to ease burdens on small businesses.
"Without deliberate interventions by the finance minister where his jurisdiction allows, some SMEs will battle to survive,” AHI CEO Dr Ernest Messina said. "For instance, to tender a bid, businesses require tax clearance certificate." Messina said that this usually involves "protracted time and onerousness involved in getting tax clearance certificates".
They are calling on government to work with SARS to prevent inefficiency in getting these certificates.  

Sign up to our Newsletter now, and don’t miss a beat.

Email Address
Sign Up