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Junk status: Entrepreneurs must get creative

Apr 19 2017 05:00
Lameez Omarjee

Johannesburg – Now that South Africa’s credit rating has been downgraded to junk status, it will take entrepreneurs longer to turn profitable, however there are still opportunities for them to thrive, said an analyst.

Ratings agencies Standard & Poor’s and Fitch downgraded South Africa’s sovereign rating to sub-investment grade. Moody’s, which has South Africa ranked two notches above junk status, has placed the country on review for a downgrade.

This move saw the rand take a knock but has since recovered. Further, business and consumer confidence is expected to decline.

Speaking to Fin24 by phone, Trudi Makhaya, a consulting economist at Mercantile Bank, explained how the downgrade would possibly impact entrepreneurs.

She said that profits would probably be lower than that in a healthier economy. Businesses would have to work harder to “prove their case” and won’t coast on the fact that the economy is doing well and that people are “throwing money around”. “It will be proper businesses that survive,” she said.

Acquiring funding will also be harder. Being investment grade was a “positive” for a country, especially in influencing the perspectives of investors who did not know much about South Africa, she explained. “Now that it's been taken away, they will be much more risk averse in considering funding entrepreneurs,” she said.

Funding will become more expensive because it will be perceived to be riskier to invest in South Africa, she explained.

Makhaya added that funding from traditional investors which supported the banking system and JSE-listed companies, will also be harder to acquire going forward. Entrepreneurs who have built their businesses to an adequate size and who wish to list their businesses on the stock exchange would probably have fewer investors, both local and international, to support them. 

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“It does not mean all is lost. It suggests entrepreneurs need to get far more creative to get funding than they would have had to.”

Seizing opportunities

Even though the environment is difficult, there are still opportunities to make money, explained Makhaya. “There are opportunities in the lower end of the market.”

For example if larger players in food retail come under strain, there may be an opportunity for smaller players to service demand in the lower end of the market. “Entrepreneurs can find a way to sell products in a creative way that does not put too much pressure on households, and does not rely on credit for instance or large purchases. Those activities will gain favour,” she said.

There is also an opportunity for entrepreneurs producing and manufacturing products in a cheaper way than those that are imported.

Besides the lower end of the market, opportunities among high-net worth individuals also abound, “the higher-end tends to survive in a recession. Rich people continue to engage in premium activities.”

Makhaya explained that entrepreneurs would have to move away from middle-income earners and consider the lower and upper ends of the market.

She added that entrepreneurs should learn to understand consumers and their behaviour. “Places like Nigeria and the whole of Africa have thriving businesses that have emerged despite unrest and civil war. This shows entrepreneurs can make money if they understand the context and are able to manage risk within the context.”

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