South Africa’s SME’s are largely confident of the future financial fortunes despite persisting harsh market conditions as caused by lackluster economic activity and volatile labour relations.
This is according to the fourth quarter Business Partners Limited SME Index (BPLSI), which measures attitudes and confidence levels amongst the Small and Medium Enterprises (SME) industry in South Africa. The index has revealed that business owners have slightly more confidence in the economy, in comparison to the last quarter, and remain positive that their own business will experience growth in the next 12 months.
The BPLSI revealed that SME owners surveyed displayed average confidence levels of 71% that their business will grow in the next 12 months. This is a slight decrease of 2% when compared to the previous quarter. In addition, business owners displayed average confidence levels of 50% that the SA economy will be conducive for business growth in the next 12 months – a slight increase of 1% when compared to the previous quarter.
According to Nazeem Martin, MD of Business Partners Limited, the relatively high confidence levels amongst SMEs regarding the growth prospects of their own businesses may be attributed to the generally optimistic nature of entrepreneurs. “This is especially true when it comes to their ability to positively shape and influence their own businesses, despite gloomy extraneous economic conditions over which they have no control.
“The fact that business owners have confidence levels of only 50% that the economy will be conducive to business growth in the next 12 months confirms exactly this,” says Martin.
He says that the consistently low levels of confidence expressed by SME owners that the economy will be conducive to business growth in the next 12 months recorded over the past few quarters is most likely related to lower economic growth forecasts. Following growth of 2.5% in 2012, the South African economic growth forecasts have been lowered to 2.7% for 2013, 3.5% for 2014 and 3.8% for 2015.
“In addition, factors such as the recent violent labour unrest in the mining and agricultural industries, which resulted in significantly above-inflation wage settlements, have adversely impacted on business confidence levels, leading to lower levels of investment in production capacity, especially by private sector firms.”
The BPLSI also revealed that business owners are slightly more confident that the ease of access to finance will improve in the next 12 months. Confidence levels increased from 43% to 45% in the fourth quarter of 2012.
Martin says that although financers, including banks, may seem keener to lend now than in the recent past, finance often comes at a price which appears high relative to inflation and SME’s own growth prospects. “This may dampen SMEs’ appetite for finance, hence the moderately low confidence levels amongst SMEs on whether the ease of access to finance will improve.”
During the fourth quarter, confidence levels of only 33% were recorded that labour laws are conducive towards the growth of businesses. Martin says that this low confidence level is worrying for the South African economy, as SMEs are widely regarded as the engines which power most economies in the world, as well as the biggest contributors to job creation.
“The effort and cost to comply with our very modern labour legislation is often out of reach for most SMEs and inhibits them from employing more people and, wherever possible, mechanise instead.
“It is precisely due to the employment creation potential of the SME sector, which, if fully exploited, could help solve the country’s unemployment challenge. More and more policymakers are recognising this potential and are increasingly calling for a twin system of labour laws, with less onerous and less costly compliance requirements for SMEs.”
According to the index, respondents have confidence levels of 31% that government is doing enough to foster SME development. Martin says that although this slight increase (in comparison to the 26% recorded in the third quarter) is positive, levels remain extremely low.
“When asked what form of assistance from government would benefit them them most, 34% of respondents indicated that direct funding would be most useful, while 22% opted for government cutting red tape and 20% indicated that government providing better tax breaks would assist most.”
On the subject of the biggest challenges that SMEs will face going forward, economic conditions placed first with 36%, followed by cash flow (28%) and funding (9%). It is evident that SMEs are faced with many challenges however they remain confident on the growth prospects for their businesses and less so on the country’s environment for business growth. This is an opportunity for government to make the necessary changes to stimulate SME formation and growth, as well as employment creation.