See OPPORTUNITY in recession and downgrading

January 2018

As normal citizens we can ask the questions – what is downgrading and recession? How does it affect me and my business? What can I do about it?

Let’s first explain these two terms. A recession is when the economy of a country declines significantly for at least six consecutive months or two consecutive quarters. The gross domestic product (GDP) is one of the primary indicators used to gauge the health of a country's economy. It represents the total Rand value of all goods and services produced in a country over a specific period. Normally during a recession there’s also a reduction in income for the country, employment, and manufacturing and retail sales. 

Think of it in terms of your business. The GDP of your business would be the total value of the products produced on your farm, in other words the gross production value. This income is used to cover all the costs of your business and to repay any debt you may have. It is logic, should your business income decrease, you will find it difficult to cover all your costs. And should you have any debt, you will find it even more difficult to repay the debt. 

The same with a country. A country has certain obligations such as paying the salaries of government employees, to provide infrastructure that is needed for the country to grow such as roads, to provide education and health services, and so on. Income is needed to cover all the costs of these obligations. The income of a country is mainly taxes collected and if there is a shortfall the country borrows money to pay all obligations. The less a country grows, the less tax will be available and more money will have to be borrowed. But remember loans must be repaid and without the necessary income from the growth of a country, the more difficult it will be to repay debt.

In comparison to your business – should you wish to borrow money from a financial institution they will ‘grade’ the possibility of your business to repay the loan using different criteria. If your business is in a sound financial position a financial institution will judge that you will be able to repay the loan and they will ‘grade’ you favourably. Should the financial institution judge that there is a substantial risk that you will not be able to repay the loan, they will ‘downgrade’ you and either not lend you the money or levy a higher interest rate on the loan.

The same with a country. The only difference being, in the case of countries there are so-called credit rating agencies that consider the risk of a country to repay loans. In the case of South Africa three credit rating agencies (Standard & Poor's, Moody's and Fitch) are involved. Based on the recession (low/negative growth), high unemployment, political factors, and other factors, two of the ratings agencies have downgraded South Africa. In other words, in their opinion they judge South Africa to be a high-risk profile to repay any loans. The third agency must still take a final decision. When all three agencies have downgraded South Africa, we will be in a full junk-status grade. Then it will be very difficult for the country to borrow funds needed to run the country and it will be available at much higher interest rates. 

A credit rating can be assigned to any entity that seeks to borrow money – an individual, corporation, state or provincial authority, or sovereign government. 

How will all this now affect myself and my business? First, should you wish or need to borrow money expect the rating criteria to be applied more stringent and higher interest rates to be levied. Money will become scarce and more expensive. Secondly, the value of the Rand could decline further which will pave the way for price increases of imported inputs such as oil. Business profits will be affected negatively by all of this.

What can I do about this? As a single person, one of some 56 000 000 million people living in South Africa. Not much. 

Perhaps you will remember the words of a song of a couple of years ago – ‘Don’t worry, be happy’. This is basically how you should approach this situation. Accept it as a challenge and sharpen your pencil regarding all the aspects of the management of your business and improve your business to deliver a sustainable profit over the long term.

Remember, the economics of the world or any country or any business goes through economic cycles – ups and downs or good years and bad years. Our country and many businesses in South Africa are in a difficult position now but things will improve again. Therefore, be ready for the good years that will follow again. Therefore, treat the recession and downgrading as an opportunity. Improve your business. 

Article submitted by Marius Greyling, Pula Imvula contributor. For more information, send an email to mariusg@mcgacc.co.za.

Publication: January 2018

Section: Pula/Imvula