Is there trouble ahead for South Africa?

Myra Knoesen, FAnews Journalist

From the weakening Rand, to high inflation costs and drought, the South African economy is facing a series of challenges which are not only affecting consumers, but companies too. With companies themselves unable to avoid or prevent the challenges that lay ahead, the harsh reality is that these hurdles and storms can result in business failures and insolvencies.

A media release from Euler Hermes says 2016 is turning out to be a tough year for corporates as companies face a series of short and long-term challenges. The report offers insights into the daily life of companies in South Africa and abroad.

2016 - A tough year

The key points that were taken out of the report are that the business environment in South Africa is clouded by ongoing structural rigidities, including uneasy labor relations and periodic disruptions to power supplies, and is compounded by at least four other factors: weak international commodity prices with commodities accounting for 14% of total GDP; slowdown in China, the country’s largest trade partner; drought conditions, with weakened agricultural output and import of maize and other foodstuffs; and uncertainties relating to U.S. monetary policy tightening.

Latin America, GCC countries and Russia faced the strongest 2015 deterioration in their sector risk profiles. Europe is the only region with a slight improvement.

Structural impediments have limited GDP growth to below that rate. These constraints include a lack of skilled labor, limited job creation (capital intensive industry), high unemployment and underemployment, infrastructure bottlenecks, weak public sector delivery and disruptions to power supplies. Euler Hermes expects annual GDP growth is likely to be below the lower limit of this range in 2016 and 2017.

In 2015, 148 industries were downgraded in the analysis, and only 76 were upgraded. As a result, 2016 started with one in four industries in sensitive or high-risk territory. For South Africa, Euler Hermes downgraded three sectors: automobiles, computers and telecom and metals.

Macro challenges

For the remainder of 2016, Euler Hermes identified five macro challenges for corporates using its sector risk approach:

• Protracted period of low commodity prices - Euler Hermes forecasts South Africa as a significant mining economy, so any positives deriving from low oil prices are offset by negatives resulting from weak ore and metal prices.
• Turmoil in emerging markets - Africa and the Middle East, and Latin America experienced 39 and 34 sector downgrades, respectively. Brazil is in the eye of the storm with 15 out of 18 industries facing a sensitive or high risk of non-payment. In contrast, Western Europe helped balance the global risk profile with 24 sector upgrades.
• Increasing debt, payment terms and credit risk - Days Sales Outstanding (DSO), a key indicator of cash flow as well as insolvencies, are increasing worldwide. For South Africa, DSO in 2015 remained slightly above 45 in average, but Euler Hermes forecasts deterioration of two days in 2016.
• More disruption - Disruption entails further risk for traditional industries. Retail is one striking example, with the rise of e-commerce and mobile technology already representing USD 3.5Trillion. Distance to the consumer, divestment from R&D and dependence on infrastructure are the three determinants for growing risk of disruption when comparing industries worldwide.
•  Another M&A wave - Euler Hermes expects global Mergers and Acquisitions (M&A) to exceed again USD 4Trillion this year, with deal volumes rising 10% to 20 000 transactions. For some time, South African corporates faced with limited growth potential in their domestic markets have sought M&A opportunities elsewhere in Sub-Saharan Africa and further afield. 

South Africa’s future 

FAnews spoke to Luca Burrafato, Euler Hermes Head of Mediterranean countries, Middle East and Africa, about the report and what it all means for South African companies, what troubles South African companies are likely to face in the future and what strategies or steps they can start to take now to feel less of an effect of the economy. 

According to Burrafato South Africa barely escaped a ratings downgrade when S&P maintained South Africa’s BBB-rating with a negative outlook. “However, GDP growth will continue to slowdown, indicators show that inflation will increase and the South African Reserve Bank will increase interest rates, putting both the private sector and consumers under more financial pressure and increased debt.” 

“This will mean that companies will carry out further cost-cutting exercises to survive, which could ultimately result in job losses. For the local insurance industry in general, the increased inflation and weakening currency could result in a rise in insurance costs,” said Burrafato. 

For the specialised line of business trade credit insurance, Euler Hermes predicts that business rescues will increase substantially, followed by liquidations. “For 2016 we expect overall insolvencies in South Africa will increase by +10% year on year, the first outright deterioration since 2009 and the global financial crisis,” continued Burrafato. 

In a risky environment Burrafato said more businesses will need credit insurance to protect their business transactions. “As a consequence of the deteriorated environment we foresee to pay more claims. In this scenario we could expect an increase in fraudulent transactions.” 

“It will be crucial in this period for credit insurers to support companies in their decision making process aimed at solid and sustainable growth in the long-term. Those enterprises that will be able to operate according to risk management policies based on a high level of credit protection will be first in row in running for success when the economy will go back to an expansion phase,” concluded Burrafato. 

Editor’s Thoughts:
Instead of dwelling on the negatives we need to focus on the positives and how we, as an industry, can grow and prosper. But is this easier said than done? Burrafato said insurers will need to continue with proactive risk monitoring and provide insurance solutions. But as new risks continue to emerge will this not get more challenging? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.