JOHANNESBURG, (CAJ News) – THE hike in interest rates in South Africa will impact negatively on small and medium enterprises, franchisers, property investors and farmers.
Analysts said this on Friday, a day after the South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) hiked the repo rate to 6,25 percent.
The hike is the second in the year.
This brings the prime lending rate to 9,75 percent.
Sanjeev Orie, Chief Executive Officer of Business Value Adds, said given the tough economic conditions that SMEs were already facing, the increase in interest rates would add more pressure by making debt more expensive.
“Profit margins are also likely to be impacted in the long term due to a lower demand from consumers that will tighten their belts as disposable income decreases,” said Orie.
Orie said for most of the middle class consumers, a rate hike typically means an increase in mortgage and vehicle repayments.
“This means that businesses that are highly geared and operating on low margins may struggle to service their debt commitments. As a result, small businesses may run into cash flow problems, making it
difficult for them to manage running costs and payments to staff and suppliers for goods and services.”
Orie said moreover, the possibility of further interest rate hikes next year would require SMEs to place more emphasis on their annual cash flow forecasts and regularly review them as business conditions change.
Morné Cronjé, Head of FNB Franchising, said an increase in interest rates would mean the cost of borrowing rises and would also mean an increase in the monthly expenses.
He said a rise in interest rates discourages investment in the franchise industry and makes it difficult for franchisees to borrow money to finance their operations, payroll and general purchases.
“Franchise owners need to be savvy and come up with real ways to increase their cash flow and cut unnecessary expenses. The more you understand the fundamentals to maintaining your business, the more likely it will survive,” said Cronjé.
He official said the interest rate increase will ultimately put additional pressure on an already stretched South African consumer.
Attie Anderson, Head of Business Lending – FNB Property Finance, said commercial property investors would be negatively affected due to a decrease in consumer spending, which would impact them directly if they are trading from the property, or indirectly if their tenants suffered as a result of the interest rate increase.
“Moreover, this could lead to tenant vacancies or rental arrears, and may even force investors to reduce their rent in order to prevent tenants from vacating and seeking more affordable rentals,” said Anderson.
He said commercial property investors that experienced cash flow strains should approach their banks for financial assistance.
Dawie Maree, Head of Information and Marketing at FNB Agriculture, said the interest rate increase would put more pressure on commercial farmers that were already facing rising debt levels due to the weak rand and severe drought which is pushing up input costs.
He said struggling livestock farmers would be hardest hit, since they had already sold off some of their stock and used the funds to cover debt.
On a positive note, Maree said, they might see retailers absorbing the interest rate increase, in order to draw more customers into their stores, by not increasing costs for staple foods such as bread and milk.
“The impact of the interest rate increase will vary from farmer to farmer depending on the size of their operation. We encourage farmers that are struggling to service their debt to seek financial advice and approach their banks for assistance,” said Maree.
– CAJ News
