Little man will ride it out

By Staff Writer

By Andile Ntingi, City Press

Even as fears of an economic slowdown loom large due to higher interest rates and power cuts, South Africa's major banks are optimistic that small businesses will survive the downward spiral.

There are also concerns that the high cost of capital will make it difficult for small firms to take advantage of the procurement opportunities of government's R611 billion infrastructure programme.

The programme will change the face of the country's infrastructure with the construction or upgrading of power stations, roads, harbours, railways, airports, pipelines and the telecoms network.

Many economists agree that an interest rate raise is almost upon us.

The size of the increase will only be known when the Reverse Bank's Monetary Policy Committee (MPC) announces its decision on April 10.

But other economists argue that it will be unwise for the MPC to raise interest rates as this will worsen the economic downturn and cut growth.

They say that a drop in retail sales and credit demand points to a slowdown in the economy.

But rising fuel costs, the depreciating rand, higher food prices and an imminent 60% rise in electricity tariffs may give the Reserve Bank ammunition to raise interest rates to curb inflationary pressures.

The prospect of another interest rate increase is a problem faced by businesses and consumers alike. The global credit shortage is another.

The credit squeeze - that led to the demise of the US's fifth-largest investment bank, Bear Stearns, this week - has been triggered by rampant defaults in the US home loans market.

The implosion in the world's biggest economy has resulted in risk aversion by global investors and caused a sharp fall in the world's financial markets.

Local bond and stock markets have also been hit hard. The economic mood has swung so sharply that the government is no longer punting the economic growth target of 6%: it is talking about a 4% growth forecast.

If the liquidity shortage filters into the South African financial markets, local companies, including banks, will have limited access to the capital needed for market expansion.

If this happens, banks will have no option but to scale back on lending. This will make it harder for consumers and businesses to lay their hands on funding.

Sean Robertson, the director of lending products at Standard Bank, says there is a chance that interest rates will increase though it will not be a sharp spike.

"There is a natural slowdown. With any credit extension when interest rates go up, the rise in rates affects consumers and smaller businesses and not large ones," he says.

Banks are already experiencing an increase in bad debts, especially in home loans, vehicle finance and credit card portfolios.

Robertson says he expects Standard Bank's small business portfolio to see an increase in loan defaults in upcoming months, but they will be in line with the lender's forecast.

The country's big four lenders have already recorded bad debt ratios of below 1%. But bad debts may rise as the economy slows down and higher interest rates bite.

Michael Vacy-Lyle, executive sales director at FNB, says the bank will not be deterred from lending to small companies as long as they have solid business proposals.

"We are open for business. We are still looking to lend to good businesses and are seeing a lot of activity around franchises," Vacy-Lyle says.

The slowdown in credit extension, especially the demand for home loans, will negatively affect small and medium-sized contractors.

They have been procuring contracts in the residential and commercial property development sector as large construction firms are tied up in big projects.

Feroz Basa, a portfolio manager at Old Mutual Investment Group South Africa, says: "The interest rates will not affect the bigger guys because we have no choice but to go ahead with the infrastructure programme.

"Otherwise we will run out of power or if we don't expand our railway network, we won't be competitive in moving commodities to the markets."

He says the high cost of capital is not the only problem confronting the construction industry.

The shortage of engineering and artisan skills and the rising cost of building materials are experienced more severely by small contractors than by bigger companies.

"It is going to be important for all contractors to price their contracts appropriately because cost pressures are building up.

"But even though we are faced with the skills shortage and expensive funding, I don't think we are going to fall off the cliff," says Basa.

However, Vacy-Lyle believes small construction businesses will not be starved of work because of the strain on the economy.

"The infrastructure programme is positive for small businesses. We also have empowerment charters that favour small businesses. The large construction companies will have to do business with smaller businesses," he says.

Donovan Steenkamp, a general manager in Absa's small business unit, says the lender will support emerging firms if their financial hardships become severe.

"We will find ways of getting them through the difficult times.

"If they land themselves in arrears, we will engage them early and see if we can alter the payment terms," Steenkamp says.

 

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