What the current economic sentiment means for SMEs

Published on April 19th, 2016

With a potential credit rating downgrade looming, many South Africans are nervous about the impact

this will have on the economy – and particularly those who own small and medium­ sized enterprises.

During an event hosted by AlphaCode, chief economist at Investec Annabel Bishop shared some key

insights around the recent budget speech and what it means for entrepreneurs and small business


Firstly, there is a trend toward fiscal consolidation, notes Bishop. This means that South Africa is on

track for a potential downgrade.

“The worry there, besides the borrowing costs going up and the negative investor sentiment, is that it

also affects our corporates quite materially as well ­ and our currency,” she explains.

What we need to remember adds Bishop, is that the budget is a plan, it’s not an actuality ­ it’s

something that plans government expenditure going forward.

“Under the budget we saw the expenditure being reeled back in, particularly current expenditure – and

if you look at current expenditure, such as civil servant salaries and wages, there are two forms of

expenditure...whether it’s on social welfare or on civil servant remuneration. Basically, we don’t want to

pull back on the social welfare, as it’s really important for us as an economy and as an emerging


“On the other hand, when we see civil servants’ salaries and wage increases at 10% plus and inflation

is running at 3% to 6% ­ that is quite substantially higher than we can afford.”

She points out that affordability is a key theme, and that credit ratings agencies are looking at the

affordability of government expenditure of its debt, in an economy that is seeing a substantial slowdown

from an economic growth perspective.

“If you had an economy that was running at above 3% growth in 2011, and in the last two quarters that

we have seen, economic growth of 0.2%...well, we’ve got a bit of a problem. And that slowdown has

been persistent over the years – it’s been a trend, it’s not a once­ off phenomenon.”

She notes that credit agencies are not sure how we will fund our expenditure plans if SA economic

growth continues to dwindle. Also, tax revenues will be negatively impacted.

Agencies, explains Bishop, are more concerned with how we will affect them, and how we will

materialise our plan ­ especially in an environment characterised by weak economic growth.

She says that while we fall into the danger zone for emerging markets in terms of our debt levels, she

also points out that this is because we are so heavily influenced by what’s happening on the global


“Junk status is not the end of the world – although it makes things more difficult as the big debt we

already have makes it a lot more difficult to service already. From an SME perspective, currency

weakness does cause inflation to go up and raises the cost of doing business.”

She explains that foreign investors want stability, and the predominant uncertainty is undoubtedly going

to be factored in to key decisions in the coming year.

“We need to focus on policies which stimulate economic growth – or rather, business confidence.

Greater business confidence equals faster economic growth,” says Bishop.

There is a direct correlation between the two, she points out. At the end of the day, she says, we need

to ask ourselves what we can do to make businesses in South Africa ‘feel better.’

Visit our YouTube Channel for the full session.