2021 is interesting for a number of reasons, not least of all that we’re heading into the second year of a global pandemic, which continues to impact markets around the world, as well as business operations on our own shores.
However, as we analyse markets and make predictions for what may happen following Minister Mboweni’s presentation of the 2021/22 budget, I believe it’s important to look at our current situation within the context of what was happening pre-pandemic, as well as the challenges and opportunities that are the result of COVID-19.
South Africa’s economic challenges were not caused by COVID-19
The reality is that we were operating in an extremely constrained economic environment pre-pandemic. COVID-19 has accelerated these challenges. South Africa has taken on additional debt, there is an anticipated gross revenue collections shortfall of R232.7 billion, and SARS is set to lose almost R30 billion in uncollected taxes, not to mention the Rand’s devaluation in early 2020 before revaluing downwards later in the year.
There is no doubt that the pandemic has had a massive impact on our local economy, but we also need to look beyond it if we want a fuller picture of our position in the global economy. More importantly, we do not believe that the virus will soon disappear, which means that businesses need to be thinking about their long-term strategies for survival and growth as these operating conditions continue.
Balancing lost investments with new opportunities
A case in point is the road show that President Ramaphosa spearheaded to attract an R1 trillion in foreign investment. These funds were earmarked for infrastructure projects and would bring much-needed funds into the country. As we saw in SONA 2021, there is a R550 billion shortfall, and while it’s easy to blame COVID, the reality is that this was meant to happen prior to 2020 but didn’t materialise.
However, investments come and go. SAB and Heineken have pulled out of investment projects totalling R3 billion, which will negatively impact job creation. On the other hand, Ford has committed R15.8 billion into upgrading one of its facilities in South Africa. This seven-to-nine-year investment programme will create 1 500 jobs.
The knock-on effects of a constrained economy
The challenge is that when an economy is already constrained, any additional pressure has a much bigger knock-on effect. For example, the fuel price increase at the start of 2021 and the second wave of COVID-19 infections resulting in Lockdown 3 being implemented again did not help an already-constrained economy. When transport costs are driven up, they are passed on to business and consumers downstream. In short, everyone is impacted, not just transport and logistics businesses.
It also impacts international sentiment. When the cost of doing business rises, investor confidence drops. That said, the rand generally follows the 80/20 principle, in that 80% of our currency’s strength (or weakness) is driven by global market events, indicators and sentiments. An example of this is the US currently lobbying to approve another USD1.9 trillion relief package, which creates excess liquidity in the market, some of which finds itself into the Rand.
The vaccine won’t be a panacea
All of this means that as a country we’re waiting with bated breath for it all to be over so that we can get back to business as usual. There are two main problems with this strategy. First, as we’ve seen, business as usual was operating in an extremely constrained environment. Second, a lot of hopes are being pinned on the roll-out of the vaccine. Roll-out problems aside, the virus continues to mutate, and we don’t know how this will impact the various vaccines available.
It’s likely that we will continue to operate under pandemic conditions for many months to come. This gives businesses two choices: Plan for continued long-term market upheavals, supply chain challenges, currency fluctuations (good and bad, after all, we’ve just seen the rand at a low of R14.41 to the US dollar) and operating through a recession or focus on the short-term only and continue to operate month-to-month.
Following the National Budget Speech, we can expect some international investor concerns and possibly a deprecation in Rand value, at least for the short term.
As we saw with SONA, there is has been little movement over the past 12 months and we’re likely to see more of the same in the Budget Speech.
Leveraging agility and technology to achieve success
So, what’s the solution? The most successful small and mid-sized businesses during this period are agile. They can make changes swiftly based on internal and external events and are able to capitalise on opportunities as they present themselves.
The leadership teams of these businesses have a good view into every aspect of the company. If they are lacking in a specific area in terms of skills or knowledge, they outsource to an expert or leverage technology (or both). COVID has accelerated the precarious position of our economy, but it’s also accelerated our adoption of technology, which is increasing the efficiency, productivity, innovation and bottom lines of businesses that have embraced these new tools.
We’re progressing in a new age of entrepreneurship in society. There are so many skills and technology platforms that individuals and start-ups can leverage to solve real-world problems.
There are also a lot of opportunities if you’re looking for them. For example, one of the highlights of SONA was the announcement of the Amendment to the Electricity Regulation Act which allows for greater self-generation of power by private firms without a license. Businesses are now able to generate 5 000MW of additional capacity, which will stabilise operates in power-heavy industries such as mining and agriculture, boost investments into these markets and creates opportunities for businesses that supply renewable energy sources.
Businesses do not need to face these challenges alone
At Sasfin, we have a team of specialists who are on hand to assist small to large businesses navigate this extremely volatile and uncertain time. It’s important to know that you’re not alone, and that you don’t need to have all of the answers yourself. We work with our clients to find the best solutions for their unique requirements.
On February 24th, South African Finance Minister, Tito Mboweni delivered his 2021 Budget Speech, sharing with the nation the state of the country's finances, and how the government intends to distribute its expenditure in the following 12 months.