Johannesburg - The aggressive slashing of interest rates by Reserve Bank Governor Tito Mboweni is unlikely to open the floodgates for new black economic empowerment deals.
BEE funds have virtually dried up since it became evident that the global economy was heading for its biggest slump in more than 60 years.
Various financiers say they are not planning to loosen the grip on their credit taps to fund potential transactions any time soon. Right now they are concerned about saving black-owned firms that have sailed into troubled waters.
Although Mboweni cut the repo rate by 100 basis points this week in order to provide some relief to heavily indebted businesses and consumers, fragile domestic spending and weak profits are encouraging lenders to cut off credit to potential borrowers.
"This interest rate cut will reduce the interest burden for existing BEE deals, but I don't expect a flood of new deals as a result of falling interest rates," says Geoffrey Qhena, the chief executive of state-owned funder Industrial Development Corporation (IDC).
"The environment is not conducive to new deals because the economy is experiencing difficulties."
Mboweni's latest loosening of the monetary policy has pushed the repo rate to 8.5% and prime lending rate to 13%. He has cut the repo rate four times since December, reducing it by a cumulative 350 basis points. The repo rate is the interest rate at which the Reserve Bank lends cash to commercial banks.
Dividends - the lifeblood of black investors
Standard Bank chief economist Goolam Ballim suggests there is unlikely to be serious corporate action on the BEE front as long as the economy is performing poorly and companies are not declaring dividends. Dividends are the lifeblood of many black investors because they use them to repay the debt they got into when they purchased their equity stakes.
Without them they are going to be further mired in debt.
"We are less likely to see an upsurge in BEE deals because the performance of the South African economy is below par and the earnings prospects for companies at this stage remain volatile," Ballim predicts.
The majority of empowerment transactions are structured in such a way that dividends are utilised to pay for the stakes.
But the dividend payout has been lower than the amount required to cover interest costs incurred by shareholders.
This means that many black investors have to wait years to settle their debts and fully own their shares or refinance the deals.
This problem has been compounded by a sharp drop in share prices due to the global economic crisis. The domestic bourse has lost more than 30% of its market capitalisation since the global credit squeeze began in 2007.
A Johannesburg-based investment banker, who wanted to remain anonymous, describes the plight of BEE investors as dire, as they are sitting with a heap of debt and near worthless stocks.
Relief programmes
Commercial banks are sitting with a long list of BEE deals that are under the water and in this current environment they will not touch new transactions," he says.
I agree with the politicians that BEE deals need to be done differently because the current empowerment model has not worked. The economic downturn has set BEE back by another seven years."
BEE deals worth more than R350bn have been concluded since 1994.
Calls for a government bailout of BEE investors have so far fallen on deaf ears because the National Treasury is unwilling to dole out taxpayers' money to a selected few individuals at the expense of a bailout stimulus that will benefit the wider economy.
State-owned financiers such as the IDC and the National Empowerment Fund (NEF) have, however, taken a sympathetic stance on the issue and are launching debt-relief schemes to save the day for cash-strapped BEE investors. These programmes have largely been generous and involve reducing interest rates or suspending loan repayments until the black investors have bolstered their cash flows.
"The NEF board approved a proposal to provide relief to about 40 small and medium enterprises that are our clients. The programme comprises a restructuring of the loans coupled with technical assistance in the form of mentorship.
"The financial relief also includes reduction of interest rates, extension of repayment terms, repayment moratoriums and conversion of debt to equity," says Philisiwe Buthelezi, the chief executive of the NEF.
There is speculation that the economy, which contracted by 1.8% in the last quarter of last year, is already in a recession.
In the months to come the Reserve Bank will be under pressure to cut interest rates further to ease the strain for debt-trapped consumers and companies.
- City Press