Government should offer debt guarantees

An independent research group is suggesting that the government should extend its helping hand to small, medium and micro enterprises (SMMEs) by guaranteeing their debt to save jobs and keep the economy running.

With the lockdown still planned to finish at the end of this month — although this would require a drop in the current number of daily confirmed Covid-19 cases — nonprofit, economic research institution Trade & Industrial Policies Strategies (Tips) tried to work out how the economy can start grinding back into action. At the core of any plan, it concluded, should be a credit-guarantee scheme for small businesses, created by the government.

A major problem for businesses during lockdown is that they are not getting money coming in, so they have little liquidity. A credit-guarantee scheme would give small businesses some cash flow so they can start operating again. This would allow them to cover costs such as new stock, turning the lights on and paying workers to come in. 

A credit guarantee is in effect an insurance product that guarantees that a lender of funds will be reimbursed should the borrower default on their loan. Small and medium-sized businesses struggle to access loans because they often default, and that reality has only become worse with the national lockdown.

Tips suggested that a credit-guarantee scheme would provide the scope for businesses to gain access to increased amounts of credit, or “to obtain credit without necessarily having the full collateral or credit history usually required by lenders, as it reduces the risk of lending to such enterprises”.

On Tuesday, reserve bank governor Lesetja Kganyago said that the extension of the lockdown will no doubt reduce growth in the short term because economic activity has come to a standstill. This, he said, will increase job losses and have further consequences for aggregate demand.

The bank is predicting that gross domestic product will shrink 6.1% as a result of the lockdown. That means fewer jobs and less money being spent, which hits small businesses hard. Without an income, these businesses will have an even greater struggle to repay loans. And with the economic effects of the lockdown — and Covid-19 itself — likely to continue for months, it isn’t clear that businesses will make money for a while yet.

A credit guarantee will lessen those worries by encouraging financial institutions to lend when they might otherwise not, according to Tips.

Its briefing notes that government assistance should be targeted at those businesses that will lose income as a result of the virus. It said resources will differ depending on the scale and type of the business.

Helping these businesses could save millions of jobs, said Tips. The brief showed that small businesses remain a significant employer in South Africa with 12-million employees (and self-employed) across the sector, of a total of 16.6-million people employed.

It said that the formal sector grew by 25%, to more than 700000 enterprises in the past four years. The informal sector grew 15% over the same period, to more than to over 1.735-million enterprises.

Tips suggested that the guarantee scheme could be brought into effect in three ways. Firstly, by a fund that guarantees a bank-issued credit card to micro and small businesses. Such a card would have limited credit amounts, to be used for purchasing materials required by traders and value-adding small business in sectors such as manufacturing, construction, or similar

Secondly, by significantly expanding the Small Enterprise Finance Agency (Sefa) trade credit-guarantee fund, to increase the number of wholesalers and materials-supply firms that issue credit lines to small businesses. 

And thirdly, by implementing a credit-guarantee scheme to guarantee banks’ small business retail loan portfolios to support an increase in credit availability to small businesses, and reduce the risk that there is a decline in finance available to small enterprises, as well as increasing the opportunities for new loan finance to small businesses.

This could add to the already existing efforts to assist the sector. So far, the department of small business development has introduced three interventions to aid small businesses that are affected by the pandemic.

These include the business growth and resilience facility, which is financially assisting SMMEs that locally manufacture or supply hygiene and medical products that are in demand to fight Covid-19; and the SMME relief finance facility, which provides soft-loan funding for existing businesses in distress due to Covid-19. The assistance will be for six months from April 1 2020. There is also the Sefa debt-restructuring facility, which will give a repayment holiday to the qualifying SMMEs for a maximum of six months, in efforts to reduce the installment burden of loan obligations on the affected SMMEs.

South Africa’s richest families have also stepped in to assist this sector by donating money. Nicky and Jonathan Oppenheimer created the South African Future Trust with starting capital of R1-billion — the fund provides interest-free loans to small businesses. The Rupert family has done the same — it provided R1-billion through its Sukuma Relief Programme. But last week it said that it has been oversubscribed within days of opening.

Tshegofatso Mathe is an Adamela Trust business reporter at the Mail & Guardian

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Tshegofatso Mathe
Tshegofatso Mathe
Tshegofatso Mathe is a financial trainee journalist at the Mail & Guardian.

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