Minister of Finance Pravin Gordhan’s 2012/13 budget speech, was met with both praise and criticism. What does it mean for small and medium sized businesses in Gauteng‘ Nedbank’s economists and the experts at Nedbank Business Banking provide a local perspective and offer some prudent advice.
In her assessment of the Budget in Randburg Nedbank senior economist Nicky Weimar put the 2012/13 Budget in context by reflecting on the continuing global economic difficulties.
Across the board, the IMF has revised estimated growth figures over the next three to five years downwards – even in China – with the Eurozone expected to contract in 2012. The two-track, stop-start global economy is still in place, with the US, UK, Japan and most European countries relying on quantitative easing now that the fiscal option is no longer available. China, South East Asia and much of the western hemisphere are looking relatively strong, while Africa – with the exception of South Africa – should be one of the best performing regions in 2012 as commodity prices rise again.
Locally, the economy is picking up but has been relatively disappointing, with growth mainly due to the consumer. 2011 ended on a surprisingly strong note, with quarter-on-quarter GDP growth just over 3%, compared to the previous two quarters that produced growth of around 1,5%. Sector growth has been a mixed bag, with finance, real estate, communications, transport and domestic trade up, and mining, manufacturing and agriculture mostly in the doldrums for much of the recent past.
South Africa in Need of Employment Opportunities and Higher Economic Growth
The domestic economy is still vulnerable to the volatile global environment and growth is expected to remain modest this year. The global and domestic policy environment is also complicated. Many countries are tightening their belts fiscally and at the same time implement financial sector reforms that will hurt growth in the short- to medium term. While South Africa has escaped some of these developments it has made the scrutiny of our own fiscus more intense, with rating agencies threatening to downgrade the country if the recent trend of higher recurrent spending is not addressed. We need more labour-absorbing and higher economic growth if inequality and poverty are to be addressed. Unfortunately, government policy is moving towards more interventionist policies and reliance on the state to deliver solutions but this conflicts with the history of non-delivery.
So how does the 2012/13 budget fare in addressing these issues‘ On the positive side, South Africa’s debt profile looks more sustainable than the picture presented last year, the focus on infrastructure is welcome, there are some benefits for affected industries in terms of industrial incentives, and social security reform and the National Health Initiative are not being introduced too precipitously given their massive fiscal implications.
However there appear to be no real game changers, nothing that will fundamentally lead to significant employment creation over the medium term. This is not Treasury’s fault as the ministry has already proposed some innovation in the form of the youth employment subsidy, but rather shows a lack of will in broader policy circles. Lack of delivery, particularly at local authority level remains another key area of concern, as does the fact that elements of industrial policy seem misdirected, aimed more at capital- and energy intensive industry. Infrastructure development is crucial and welcome, but there is a danger that large, ambitious, long-term projects receive more attention than smaller, more effective short-term interventions. It is also vital that the private sector plays a key role in the execution and financing of much of the additions.
How the Budget Impacts Your Business
So, while we know the basics of the Budget and the state of the global economy, do we understand how they impact on the average business in South Africa‘ Given their objective to make things happen for local businesses, Nedbank Business Banking has interpreted this information into insights for local businesses in specific industries.
“South Africa’s exporting industries – particularly agriculture, mining and manufacturing – are the most vulnerable to developments in the global economy. Agriculture and manufacturing face the greatest risk, given that the bulk of their sales go to Europe, the UK and the US. Food security, particularly, is an issue in South Africa, as it is globally. Just five years ago, South Africa was a net exporter of food, but today we are net importers of food. The local agricultural industry faces immense challenges due to uncertainty about land reform, as well as competitive pressures,” says Soemaya Boomgaard, Nedbank Business Banking’s Regional Business Head for Gauteng West.
“Mining is helped by the fact that well over 40% of SA’s mining exports are destined for Asia. As the demand for basic commodities increases sharply in line with the growth and development of the large populations in China and India, outstripping the growth in supply, prices are under strain. But this is also creating opportunities, especially for commodity-rich countries such as South Africa. However, smaller operations in the export-orientated sectors are likely to face pressure in 2012 and volumes, margins and profitability will continue to be stressed. These businesses should focus on containing costs, building cash reserves and improving efficiencies, perhaps through the moderation of existing production capacity.”
In the medium term, household spending and the services sectors are likely to drive growth locally. “Companies in the services industries should fare relatively well, but value will remain a priority for cautious consumers, suggesting that while volumes may be reasonable, margins will be under strain in the more robust areas of the economy,” comments Boomgaard.
Companies exposed to, or operating within the construction and building industry have had a very tough time. “The recent budget suggests there is a renewed focus on infrastructure and greater urgency to overcome the bottlenecks in the system which delayed capital expenditure. If government’s infrastructure programme does come back on track with the necessary urgency, the construction sector can be expected to bounce back off a very low base,” notes Boomgaard.
“The West Rand is home to a variety of businesses and industries. Key industries include construction and related, mining, industrial, manufacturing and franchise. Although we experienced a marked reduction in credit demand in 2010 through to 2011, we have found that we are receiving an increasing number of requests for new or higher facilities from most of our clients. We have weathered the storm with our loyal clients and are excited and optimistic about this turnaround.”
Local businesses operating in this volatile and tough economic landscape will do well to take a cautious but rational approach – tightly controlling costs and keeping cash balances positive to create a sound base from which to explore opportunities. “If a good opportunity presents itself, business owners should explore it cautiously from a sound base,” concludes Boomgaard. “When doing so, local businesses will find Nedbank Business Banking’s assistance invaluable, as we provide a single, locally-based point of access to Nedbank’s world-class banking expertise, industry-specific solutions and comprehensive financial products and services, all of which can be specifically tailored to assist each individual business in Western Gauteng to achieve its unique goals. We look forward to assisting our clients in growing their businesses and will continue to deliver a superior service that allows us to “make things happen” through tough economic times.