Major corporations in the mining and steel production industries, including Anglo American, Sibanye Stillwater, and ArcelorMittal South Africa, have reported reduced output and profitability because of higher operational costs and declining global demand for raw materials.(Madelene Cronje)
South Africa’s low economic growth over the past few years has greatly affected small-
to medium-sized businesses and is now starting to affect larger enterprises. The local economy grew by 0.3% in 2023 and has shown little improvement during the first half of 2024, according to Statistics South Africa.
Low economic growth has led to numerous small business closures and has caused some larger firms to become technically insolvent. Key contributors to the economy’s stagnation include power supply issues, particularly in 2023 when the country experienced record load-shedding hours, requiring businesses to invest in backup and alternative energy supply sources. For smaller enterprises, this task has proven cumbersome because of issues such as affordability and access to debt or financing to invest in backup energy systems.
For larger enterprises, investing in alternative energy sources has been relatively costly. But, based on recently shared financial results across various enterprises, the energy crisis is taking its toll on industrial South Africa, with the investment in alternative energy sources increasing various enterprises’ short-term capital and operational expenditures.
In addition to the energy crisis, rising interest rates have raised borrowing and repayment costs, rendering it difficult for businesses to sustain operations through higher debt costs. For smaller businesses, which often have to contend with securing higher interest-rate debt (based on higher financial risk ratings when applying for loans), investing in keeping their businesses alive often exceeds what they can afford to pay in terms of loan repayments. Repayment periods are also fixed and rigid, again a function of smaller businesses being of higher financial risk and having limited credit histories compared to their larger counterparts. Their potential to negotiate for repayment breaks during the overall repayment schedule is also scant.
These limitations could have contributed to several businesses folding under pressure over the past few years. Demand, both locally and internationally, could have also declined, brought on by the global economic downturn and exacerbated by geopolitical tensions and supply chain disruptions. This, in turn, could have reduced supply opportunities and contributed to the larger brands winning at the expense of the smaller brands and businesses.
By sector, the strain on small businesses has been particularly severe across the country’s retail, hospitality and manufacturing sectors. Higher electricity costs combined with erratic supply have made it difficult for these businesses to operate effectively and efficiently. Additionally, reduced consumer spending because of higher inflation and unemployment has led to a decline in demand for these sectors’ small business goods and services.
In the agricultural sector, small-scale farmers have struggled with climate change, drought, and electricity shortages, which have impacted their capacity to irrigate their fields. The limited capacity to irrigate has led to lower yields and overall financial instability. Additionally, issues experienced within the country’s transport and logistics sector have compounded problems for farmers in terms of getting their products to market locally and regionally.
The depressed economy is now starting to be felt more and more by the larger enterprises. Major corporations in the mining and steel production industries, including Anglo American, Sibanye Stillwater, and ArcelorMittal South Africa, have reported reduced output and profitability because of higher operational costs and declining global demand for raw materials. This has resulted in some of the larger-scale outfits scaling back respective operations and delaying the rollout of announced expansion projects.
Follow-on consequences have included job losses and decreased secondary economic activity across several mining communities. Beyond mining, the domestic retail and consumer goods sectors have also been hit hard by the slower economic growth. Large retailers have reported sales declines because of consumers tightening their belts amid rising living costs. Spending has been affected by reduced household and disposable incomes brought on by increased unemployment. The country’s unemployment rate stood at more than 33% during the first quarter of 2024, with youth unemployment exceeding 60%, according to StatsSA. As a result, enterprises including Massmart and Edcon reported significant financial losses that have led them to close several stores across the country. And the larger manufacturers, including the vehicle sector, have also experienced significant problems, with reduced output and increased production costs, leading to layoffs and factory closures.
Resolves that protect small businesses from financial ruin and sustain larger businesses are urgently needed to revive and progress South Africa’s economy. An operational review of the economy suggests that fixing the energy crisis is paramount to returning the economy to larger and hopefully above-inflation growth over the medium and longer term. Building and connecting more renewable energy to the grid seems to be one solution that needs to be prioritised, with both the private and public sectors contributing to this addition in generating capacity.
After temporarily halting load-shedding, Eskom needs to further invest in improving the efficiency of existing and soon-to-be-commissioned power plants, guaranteeing a more stable, reliable, and affordable electricity supply. For small- to medium-sized businesses, policy reform that supports their growth through reducing their costs of doing business, aided by initiatives such as lowered interest rates, providing tax incentives, and increased market access, are among the aspects that could support them to remain viable and grow over the medium and longer term. For the agricultural sector, increased investments to improve water management and irrigation systems, and enhance logistics and transport infrastructure (including the cold chain), are key factors that could benefit both small- and larger-scale farmers.
The time to stop the rot is now. Reducing the spread of financial ruin to the larger businesses, which are in principle too big to fail, should be examined urgently to understand what relief is required and how this relief can be instituted immediately to avoid economic sector turmoil. Lessons should be learnt from the country’s construction sector, which has struggled to recover post some of its larger players being placed under business rescue. Challenges are mostly operational and overcoming them will come down to political will and attracting investment to build infrastructure that facilitates key sectors growing their output, and over time, their sales and profitability.
James Maposa is the managing director of Birguid.