International business report

South African business optimism remains low

The latest Grant Thornton research highlights that South Africa’s businesses remain pessimistic in terms of expectations for future business growth prospects reflecting only 5% optimism for the second quarter of 2015. While this certainly is an improvement on Q1 2015’s figure of -4%, this total is well below optimism levels recorded this time last year (Q2: 2014 – 35%) and forty percent down from the same period in 2013 (Q2: 2013 – 45%).

Grant Thornton’s International Business Report (IBR)’s second quarter research for 2015 reveals a depressed South African economy as the threat of strikes and unemployment remain high. Continued increases in costs, poor government service delivery and crime are ongoing issues which are directly impacting SA privately held business executives.

But there is a glimmer of hope on the horizon with South African business executives silently thanking the National Energy Regulator (NERSA) for rejecting Eskom’s requests during June to hike electrical costs by yet another 25%. A massive 57% of SA companies stated that rising energy costs are the biggest, most impactful constraint to business growth, according to the second quarter IBR findings for 2015.

“Increased energy costs in South Africa while operating businesses on an unreliable electricity grid, combined with fears about the real future sustainability of energy for business is a serious concern,” says Ian Scott, CEO of Grant Thornton Cape. “In addition, the weak rand continues due to continued weak commodity prices and ongoing negative sentiment. Poor economic growth is the end result, and this is causing ‘stagflation’ – a combination of low economic growth with inflation.”

The Q2 2015 IBR from Grant Thornton provides tracker insights from around the world on a quarterly basis. These findings are from the IBR’s second quarter tracker data for 2015 to end June, revealing findings from business executive interviews held during May 2015. The IBR survey specifically presents perceptions into the views and expectations of over 12500 C-Suite interviews in total per year across 45 economies on an annual basis (3300 interviews per quarter). The Report also highlights regional and national perceptions of privately held businesses regarding crime, service delivery and political climate of 400 South African business owners annually (100 SA business executives per quarter).

Compared to South Africa’s pessimistic economic outlook of just 5% for Q2 2015, globally business optimism climbed 12 percentage points since Q1 to 45% in Q2 with many of the world’s largest economies posting significant improvements. The BRIC economic region seems to be well aligned to the optimism recorded globally for the past few quarters. Optimism in the United States, where businesses have been adding jobs rapidly, rose 11 percentage points to 54% and in China, 46% of businesses are optimistic in the outlook compared with 34% in Q1. In Europe, business confidence rose for the fourth straight quarter to 58%.

“Despite some uncertainty during the quarter under review over the future of Greece in the eurozone and some political uncertainty, business leaders globally are increasingly confident in the economic outlook. With so many large economies reporting increased confidence, the global economy is clearly headed in the right direction,” says Scott. “Business growth feeds on confidence – the confidence to make an acquisition, to expand abroad, to hire new people – and we can only hope that South Africa follows suit particularly in the face of some relatively severe geopolitical headwinds.”

Scott says he expects the USA to raise interest rates this year and he fears that South Africa will have to follow suit which will add to inflationary pressures and consumer hardship.

“It will be interesting to see the Reserve Bank’s repo rate decision this week following their quarterly meeting from 21-23 July,” he adds.

Constraints to business expansion loom unresolved for SA businesses
The Q2 IBR data to end June 2015 also highlighted that the same set of factors are constraining business growth with a massive 57% of South African businesses seriously concerned about rising energy costs, 45% expressing concern regarding economic uncertainty, 41% constrained by exchange rate fluctuations, 39% stating that over-regulation and red tape are restricting business expansion and 36% constricted by a lack of availability of a skilled workforce.

“The local factors constraining business growth are massive and there seems to be no light at the end of the tunnel, literally,” laments Scott. “In fact, rising energy costs, our exchange rate concerns and many other factors highlighted by SA business executives are probably the direct cause of our economic uncertainty in the country – it’s a real and true domino effect that’s hurting our privately held business executives.”

Globally, the biggest constraint to business growth for the second quarter of IBR 2015 is anxiety regarding economic uncertainty with 36% of businesses worldwide ranking this factor as a core inhibiter (SA – 45%). This is followed closely by rising energy costs (Global – 31%), a shortage of orders resulting in low demand (Global – 30%) and the lack of availability of a skilled workforce seems to impact worldwide businesses too (Global – 30%).

“Sustainable skills development is a major concern worldwide,” continues Scott. “This constraint highlights the huge demand for a workforce that is literally unavailable globally and it emphasises how countries are limited in terms of growth due to this issue.”

Rising crime hits hard on the bottom line
Crime and the direct impact this has on business and on individuals once again plays a major role in impacting SA businesses, according to the Q2 IBR research.

When SA business owners were asked if, in the last 12 months, they had directly been affected, or whether their staff or family of staff had been affected by the threat to personal security such as house breaking, hijacking, violent crime, road rage, the results were very disturbing with a massive 65% stating yes.

“Crime has affected our business environment and the foreign investment we should be getting, for far too long,” says Scott. “It’s a small blessing to note that our Q2 2015 figure of 65% is the same as the rolling average recorded in 2014 – let’s hope this levelling off signifies a turn for the better.”

When South Africans were asked to list the ways in which their businesses were affected by crime, 82% stated that the increased costs for security are a serious financial burden.

Poor Government service delivery a growing concern for SA businesses
Second quarter IBR data for 2015 reveals that a massive 71% of all business owners surveyed are affected by poor government service delivery. This has increased from 62% in Q2 of 2014, from 59% in Q2:2013 and from 57% during Q2:2012.

The greatest concern in terms of poor service delivery for SA business owners is that of basic utility services (water and electricity supply) with 87% of SA businesses seriously affected by this issue.

Road infrastructure concerns (such as potholes and traffic light issues) and the negative impact this has on SA business executives is affecting 59% of those individuals surveyed. This figure is down from Q2:2014 (65%). Half of SA businesses (50%) stated that billing issues as a factor of poor government service delivery, is affecting their growth and this figure is also down since Q2:2014 (57%).

“It’s encouraging to see that road infrastructure concerns and billing issues are declining as factors impacting SA businesses,” says Scott. “I hope this is an indication that local municipalities are overcoming some of the problems here and that a visible improvements are ongoing. My wish is that basic utility services from government also start to show some progress soon too.”

SA businesses respond to corruption with added compliance
The good news from the second quarter’s IBR findings is that business executives continue to fight corruption through the implementation of appropriate risk management procedures. When SA executives were asked how their businesses have responded to the threat of corruption, a resounding 81% said that they have implemented risk management strategies. Two thirds (66%) stated that they had increased transparency, 63% confirmed that formalised procurement policies had been introduced, with 54% of SA businesses having introduced active and responsive anti-corruption policies and 51% had strengthened their audit practices.

“These anti-corruption measures are outstanding,” applauds Scott. “South Africans are renowned for being very compliant and it is encouraging to see active business participation in new procedures which will dramatically assist in the prevention of corruption in the years ahead.”

Conclusion
“With so many large economies reporting increased confidence, the global economy is clearly headed in the right direction. Let’s hope the South African economy and the greater African continent starts to turn soon, too. We need local government’s commitment to fix our many factors hampering growth and expansion locally, but an upswing in the economy to mirror global trends would most certainly be welcomed,” concludes Scott.

About International Business Report
The Grant Thornton International Business Report (IBR) provides insight into the views and expectations of more than 12500 businesses per year across 45 economies. This unique survey draws upon 22 years of trend data for most European participants and 11 years for many non-European economies. More information: www.grantthornton.global