The South African economy is currently in full freeze in the face of a deep crisis, as we have recently been downgraded to junk status and the unemployment rate continues to soar.
The severity of the damage on small businesses is inevitable. Many small business owners, previously relying on government subsidies or COVID-19 grants, have exhausted all their options as these funds are beginning to dry up. Conversely, these sectors employ a significant number of people and the upsurge in overhead costs is turning out to be unbearable for some of the small firms. This in turn will lead to further retrenchment or salary cuts.
Unfortunately, some small businesses have used credit to keep their businesses afloat. Small businesses will be hit harder than large corporates because of the inaccessibility to bank finance. This may be due to either high default rates or high levels of debt in their balance sheet. Currently, most of these businesses are surviving on their last grains, hoping for the reopening of the economic activity to rebuild their cash flow and keep jobs alive.
What about consumers?
One indication that things will deteriorate quickly if proper measures are not in place, is the fact that many big retailers are presently shutting down their shops or applying for business rescue. This also serves as a clear indication that the future does not look rosy for low-income consumers. Low-income consumers will be hit harder because of their limited access to credit and poor cash flow position. Many low-income consumers will not be able to survive due to the high cost of borrowing, high level of household debts and increase in the cost of living. Consequently, we should be gearing up for a financial bloodbath. Many consumers continue to default on their monthly debt repayments, some consumers seem to have exhausted all options and it is just a matter of time before the South African Reserve Bank decides to raise the repo rate.
Amidst all the chaos, consumers are unable to make sound financial decisions and many over-indebted consumers are caught between a rock and hard place considering the level of arrears accumulated during the lockdown. Those who had their heads above water prior to the lockdown are now drowning into debts, and those who were drowning into debts have no idea what it will take to climb back. The pain is so severe, because the economy contracted by 1.4% between October and December. The lockdown and low economic growth has made it even worse for many households.
The data from Stats SA shows that household spending increased by 1.4% in the final quarter of 2019. This means that it currently costs more to survive on the same income one had a few years ago, whilst there is further decline in economic activity. Therefore, revealing a very gloomy picture of our economy.
Policy reform required
We need strong economic actions and solid change of policies if we are to reform our economy and save many jobs. There is a need to promote SMMEs and get more foreign direct investment which will grow the economy and massively invest in skills. The government needs to implement policies that will encourage more investors, such as ensuring that the economy is corruption free and that investment funds are safe.
It is about time that the government creates some form of incentives for foreign capital to stimulate the economy. At the current rate, the government is exhausting all its options and does not seem to know which direction to take as our debt book looks scary. Our conservative approach is costing us many jobs and affecting many lives. In addition, it is draining taxpayer’s money into dead assets, which require some form of privatization to give the economy a solid jump-start and attract technical skills.
Socio-economic challenges, such as unemployment and poverty will not go away if we do not grow the economy. There is a need to promote major entities and improve certain incentives to create growth and development. Such action will lead to more participation of different economic players and promote entrepreneurship in the country. Consequently, this will not only grow our economy, but promote employment.
It is true that we are navigating through uncharted waters and the economy will be hit hard in the short term. This will be felt strongly by low-income earners, however, the application of some of these economic policies and re-opening of economic activities can ease the pressure and make the long term outlook more promising.