All indicators are that 2012 is set to be a challenging economic year. As banks tighten up on loan requirements and funding becomes more difficult to secure, South African business owners are urged make funding provisions to protect their businesses from the damaging financial effects of market fluctuations. However, they may need to look to sources other than banks to do so.
This is according to Gary Palmer, CEO of Paragon Lending Solutions, who says growing pressure on banks due to economic stress and new legislation is likely to significantly impact business owners who need to secure finance for their businesses in 2012.
“It is difficult to fathom anything but a weak global growth environment in coming years. As a result and as banks struggle to meet the stringent net funding requirements of Basel III, lending policies are not likely to loosen up for some time and banks will likely pursue other, more profitable income streams such as unsecured lending,” says Palmer.
Palmer adds that increased tax rates and austerity packages — especially in the US and eurozone — with a knock-on effect on demand for resources, will impact the domestic economy negatively, placing further stress on local business owners.
Meanwhile, local interest rates are set to remain unchanged for the first few months of 2012, in spite of some concern that the South African Reserve Bank is underestimating the effect of the rand’s recent weakness on inflation.
‘Additional pressure’
Palmer says provided gradual global economic recovery prevails, which will deem additional monetary stimulus unnecessary, analysts predict that the next domestic interest rate hiking cycle will probably start in the third quarter of 2012.
“Increased interest rates will put additional pressure on borrowers to meet monthly instalments required by the banks and other lenders. All borrowers, including property investors, property developers and owner-managed businesses should do a stress test on their forecasted cash flows to ensure that they will still have the ability to meet monthly interest obligations given the possibility of various interest rate increases.”
In addition, although their baseline forecast is for Consumer Price Index (CPI) to re-enter the target in the first half of 2012, analysts warn that if recent rand weakness is sustained, there is a significant risk that CPI will remain above target throughout 2012 — further reducing disposable income levels and placing additional financial strain on South African businesses.
Palmer also predicts that a weak outlook for the property market — with particular pressure on commercial property — will negatively impact borrowers who are looking to secure loans timeously.
Equities remain high
“Banks may become more conservative with commercial property finance given the softening of commercial property valuations. Borrowers can expect slower turnaround times from the banks and more conservative loan-to-value ratios.”
He says analysts believe the South African equity market looks cheap versus long-term forward Price-Earnings (P/E) ratio averages. He warns that low interest rates make equities look more attractive than other asset classes but the risk relating to equities remains high considering the global economic uncertainty.
“Business owners need to make financial provisions for this kind of economic climate now in order to allow themselves to take advantage of business opportunities in light of the fact that banks are going to impose stricter lending criteria in 2012.
“This means seeking financial advice and sourcing additional funding from alternative sources who will meet their requirements quickly and reliably,” concludes Palmer. — I-Net Bridge