- IBR Q3 2017
SA execs adopt ‘wait and see’ approach as expansion and investment plans are put on hold for yet another quarter
Economic instability seems to be the ‘new normal’ in South Africa as 72% of business executives confirm that turbulence in the SA economy over the past six months has affected business operations and decisions.
When asked in Grant Thornton’s International Business Report (IBR) for the third quarter of 2017 to explain how this turbulence had affected privately held businesses and listed companies, 68% of the SA business executives stated that they were delaying business expansion plans, 61% were putting off investment decisions, 38% were considering investing offshore and 28% were contemplating selling their businesses.
“Our IBR data for Q3 to the end of September 2017 shows a nation that is experiencing total uncertainty with no sign of any stability on the horizon,” says Gillian Saunders, Head: Advisory Services at Grant Thornton South Africa. “The fact that businesses are delaying important investment decisions or expansion plans, coupled with a challenging economic environment, indicates they are just managing to keep their heads above water, with operations stagnant ‘in a holding pattern’ of sorts. It’s very concerning.”
The International Business Report (IBR) from Grant Thornton provides tracker insights from around the world on a quarterly basis. These findings are from the IBR’s third quarter tracker data for 2017, revealing views from business executive interviews held between August and September 2017. The survey presents perceptions into the views and expectations of over 9600 C-Suite executives in privately-held and listed businesses, across more than 36 economies (more than 2400 interviews per quarter). Regional and national perceptions are also researched every quarter for South Africa, from 400 SA privately held business executives annually (100 executive interviews per quarter) regarding the business environment, and other issues such as crime, service delivery and the political climate.
SA execs are the second most pessimistic nation worldwide
Coupled with uncertainty affecting investment decisions and expansion plans, when asked how optimistic SA business executives are regarding the outlook for the country’s economy over the next 12 months, businesses confirmed a negative outlook for the second consecutive quarter – at on balance -6% (6% pessimistic). This balance statistic is determined by calculating the percentage of respondents who report a positive outlook, less the percentage who report a negative outlook for the year ahead. In the case of Q3 2017 the outlook is negative with net 6% more negative responses expressed than positive.
There is some improvement, though, compared to the previous quarter (Q2) when the figure was -28% pessimistic and we were the most pessimistic of the surveyed 36 countries. South Africa this quarter recorded the second lowest figure, with Japan at the lowest with a negative 14% (-14%) pessimistic outlook.
How optimistic are you for the outlook of your country’s economy over the next 12 months?
Source: Q3 2017 Grant Thornton International Business Report
“For South Africa, most of 2017 has been marred by political upsets and these were followed by subsequent downgrades of the nation’s sovereign credit rating by key ratings agencies,” says Saunders. “Then, towards the end of the third quarter massive ructions occurred with further developments which drew the nation deeper into the ‘state capture’ debacle, and more concerning revelations were uncovered regarding high profile private companies with suspicious Gupta ties. The year is going from bad to worse.”
Conversely global business optimism was fairly stable at +49% optimistic for Q3, just two percentage points below the +51% recorded during the second quarter of this year. Optimism among firms in the US is well above the global average at 70% in Q3, while Chinese business optimism has hit a three-year high of 52%.
“South Africa’s instability, uncertainty and pessimistic outlook has no doubt influenced the World Economic Forum’s Global Competitiveness Report for 2017-2018 in which South Africa’s overall ranking declined 14 places to 61st position from 47th. The survey cited political instability, poor work ethic, restrictive labour regulations and an inadequately educated workforce as some of the key reasons for the decline. All signs are pointing to a disturbingly rocky situation – it is crucial for everyone in every corner of the country, and across private business, government and public sector, to start working collaboratively to try and re-establish some stability for our nation,” said Saunders.
Business expansion constrained by economic uncertainty, exchange rate volatility and over-regulation
According to Grant Thornton’s IBR data for Q3 2017, the top four constraints to business growth for South African executives are: economic uncertainty (59%); exchange rate fluctuation (48%); rising energy costs (34%); and over-regulation / red tape (33%).
“These four constraints just keep reaffirming the same concerns,” says Saunders. “Naturally a nation will struggle with exchange rate volatility when economic uncertainty is rife. Regulation and red tape is also weighing down on South African businesses’ ability to function effectively as a result of excessive administrative and legal requirements which need constant attention.”
The greatest constraint to growth globally recorded for the third quarter of this year is the lack of availability of a skilled workforce, with 38% of the executives surveyed worldwide lamenting this issue, while economic uncertainty is recorded as the second biggest constraint to expansion by 32% of executives. Over regulation is the world’s third greatest restraint to business growth (IBR Q3 2017 Global: 27%) and this is tied with the issue of a lack of orders (low demand for goods) also at 27%. South Africa therefore shares two of the top four constraints with the general global environment, but experiences them far more acutely.
The South African businessman remains an eternal optimist
Every quarter, Grant Thornton’s IBR asks respondents if they believe that South Africa still presents good business opportunities and every quarter, the responses are surprisingly positive. For the third quarter of 2017, 89% of SA business executives confirmed that they believe the opportunities in SA are good.
“South Africa has always been a country of opportunity. We’re a resourceful, entrepreneurial and resilient group of people who work smart to ensure that business operations continue as best as they can, and can see beyond the current turmoil to a country that does present great opportunity if the political and economic environment were stable and stimulatory.” says Saunders. “After all, if we didn’t have our positive attitudes, what would we have left?”
Burden of crime on business worsens by 20% since Q3 2016
Saunders laments the desperate crime situation in South Africa which continues to impact on business. When executives were asked if they had been affected by the threat to personal security as a result of contact crime events, 64% said yes. Contact crime is defined in the IBR research as housebreaking, violent crime, road rage or hijacking.
“When analysing our crime data for the past few quarters, it is even more concerning to note that this figure is 44% higher than what was recorded during the third quarter of 2016,” she says (Q3:16 = 45%). “It is truly alarming to see that the impact of crime is increasing once more.”
South Africa’s national crime stats which were released last month, corroborate this increased impact, when for the period of 1 April 2016 to 31 March 2017, they show that hijacking, aggravated robbery and house robberies have increased by 7% to nearly 180 000 incidents reported, compared to the previous year.
“The figure reported is completely unacceptable though. One hundred and eighty thousand such crime incidents in a year is a shocking figure,” says Saunders. “That equates to nearly 500 of these events every single day of the year. As a nation, our crime situation is abominable, and it directly affects business operations, foreign direct investment and tourism. We have to get a handle on this situation – it’s a matter of national emergency.”
Saunders concludes: “Despite South Africa being caught in a vortex of despair, we urgently need to re-direct our focus and concentrate on stability. We can only hope that some of the political developments, such as the ANC’s elections, which are taking place in December this year, will work towards stabilising our nation, following which the rebuilding can hopefully begin in earnest.”
Additional notes of interest:
- While South Africa has a positive outlook in terms of expectations to employ people in the coming 12 months, the nation is placed in the bottom five countries for this metric (net 20% of executives expect to employ more people in the year ahead – Global: 35%)
- South Africa ranked in the bottom 10 countries in terms of how the lack of a skilled workforce constrains business expansion (SA: 27%; Global: 38%)
- South Africa ranked in the top 10 countries worldwide and above the global average in terms of expectations for investment in technology (SA: 54%; Global: 47%);
- South Africa ranked in the top 10 countries worldwide and above the global average in terms of expectations to increase selling prices in the year ahead. This is most likely as a result of the countries high inflation compared to other countries (SA: 41%; Global: 29%).