Publications
Partners
Cape Town - The high level of uncertainty in the South African economy is beginning to have a noticeably negative effect on the failure rate for small businesses.
Given that the government has earmarked the small and medium enterprises (SME) sector as a key driver of growth and employment, this is an ominous sign for South Africa’s economic prospects and ultimately job creation.
This is according to Eyal Shevel, head of the corporate sector at Global Credit Ratings (GCR), who says the difficult operating environment that has prevailed over the past year is clearly feeding through to the SME sector.
“Businesses who seemed to be in healthy positions and flourishing a year ago are now starting to suffer, even collapsing as a result of the economic pressure. This raises a red flag for us in terms of job creation,” he said.
According to Shevel, many SMEs that were experiencing good growth 12 - 18 months ago actively took on more debt to continue funding an aggressive growth strategy.
However, as a result of the slowing economy, deals have begun to fail, which combined with slower or negative growth in core operations has left many business owners with high levels of debt that they are unable to service.
“This is a trend that we are seeing across the board and is not sector specific,” he said.
This is particularly concerning given the extent to which government relies on SMEs to fuel the growth of the economy.
Research by the South African Institute of Professional Accountants (Saipa) showed that in 2012, 61% of those who were employed worked for an SME, while SMEs also provided between 52% and 57% of the country’s gross domestic product.
According to Shevel, all businesses face significant cash flow and operational challenges at the moment, but the larger well established listed companies have the necessary liquidity in terms of cash reserves.
“To weather the storm, SMEs are going to need to focus on their core operations and avoid the risks associated with new projects and rapid expansion," recommends Shevel.
“Obviously this is not the ideal message to be conveying, as it is this risk taking and entrepreneurial spirit that transforms small businesses into large ones and helps drive economic activity. But this can only be achieved if your core operations are healthy and generating sufficient cash flow."
Shevel notes that as economic constraints seem to be more systematic than sector specific, government and big business need to co-operate more to get the economy moving in the right direction.
“There is still an appetite from SMEs to invest in the country. The first half of 2013 saw a record number of new corporate ratings issued by GCR, with the implication being that companies are looking for funding for new projects or opportunities,” he said.
“Nevertheless, the pipeline is definitely looking less robust and if these issues are not innovatively handled they could have long-term negative consequences on the ability of the economy to grow,” said Shevel.
- Fin24
Given that the government has earmarked the small and medium enterprises (SME) sector as a key driver of growth and employment, this is an ominous sign for South Africa’s economic prospects and ultimately job creation.
This is according to Eyal Shevel, head of the corporate sector at Global Credit Ratings (GCR), who says the difficult operating environment that has prevailed over the past year is clearly feeding through to the SME sector.
“Businesses who seemed to be in healthy positions and flourishing a year ago are now starting to suffer, even collapsing as a result of the economic pressure. This raises a red flag for us in terms of job creation,” he said.
According to Shevel, many SMEs that were experiencing good growth 12 - 18 months ago actively took on more debt to continue funding an aggressive growth strategy.
However, as a result of the slowing economy, deals have begun to fail, which combined with slower or negative growth in core operations has left many business owners with high levels of debt that they are unable to service.
“This is a trend that we are seeing across the board and is not sector specific,” he said.
This is particularly concerning given the extent to which government relies on SMEs to fuel the growth of the economy.
Research by the South African Institute of Professional Accountants (Saipa) showed that in 2012, 61% of those who were employed worked for an SME, while SMEs also provided between 52% and 57% of the country’s gross domestic product.
According to Shevel, all businesses face significant cash flow and operational challenges at the moment, but the larger well established listed companies have the necessary liquidity in terms of cash reserves.
“To weather the storm, SMEs are going to need to focus on their core operations and avoid the risks associated with new projects and rapid expansion," recommends Shevel.
“Obviously this is not the ideal message to be conveying, as it is this risk taking and entrepreneurial spirit that transforms small businesses into large ones and helps drive economic activity. But this can only be achieved if your core operations are healthy and generating sufficient cash flow."
Shevel notes that as economic constraints seem to be more systematic than sector specific, government and big business need to co-operate more to get the economy moving in the right direction.
“There is still an appetite from SMEs to invest in the country. The first half of 2013 saw a record number of new corporate ratings issued by GCR, with the implication being that companies are looking for funding for new projects or opportunities,” he said.
“Nevertheless, the pipeline is definitely looking less robust and if these issues are not innovatively handled they could have long-term negative consequences on the ability of the economy to grow,” said Shevel.
- Fin24
