Interest rate hike to hit SMEs, farmers and investors hard

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Johannesburg, 24 September 2015 - Interest rates remain unchanged, for now. The Reserve Bank's Monetary Policy Committee is taking a cautious approach as it monitors the country's economic conditions.

Johannesburg, 24 September 2015 - Interest rates remain unchanged, for now. The Reserve Bank's Monetary Policy Committee is taking a cautious approach as it monitors the country's economic conditions.

JOHANNESBURG – The latest hike in South African interest rates will negatively impact small and medium enterprises, franchisers, property investors and farmers as already

stretched consumers tighten their belts further, analysts said on Friday.

The South African Reserve Bank’s (SARB’s) Monetary Policy Committee (MPC) hiked the repo rate to 6.25 percent late on Thursday – the second interest rate rise this year – bringing the prime lending rate to 9.75 percent.

Analysts said SMEs were already facing tough economic challenges and that higher interest rates would add pressure by making debt more expensive.

“Profit margins are also likely to be impacted in the long term due to a lower demand from consumers that will tighten their belts as disposable income decreases,” said Sanjeev Orie, Chief Executive Officer of Business Value Adds.

“This means that businesses that are highly geared and operating on low margins may struggle to service their debt commitments. As a result, small businesses may run into cash flow problems, making it difficult for them to manage running costs and payments to staff and suppliers for goods and services,” he said.

Morn Cronj, head of FNB Franchising, said a rise in interest rates discourages investment in the franchise industry and makes it difficult for franchisees to borrow money to finance their operations, payroll and general purchases.

“Franchise owners need to be savvy and come up with real ways to increase their cash flow and cut unnecessary expenses. The more you understand the fundamentals to maintaining your business, the more likely it will survive,” said Cronj.

Commercial property investors will also be negatively affected due to a decrease in consumer spending, which would impact them directly if they are trading from the property, or indirectly if their tenants suffered as a result of the interest rate increase.

“Moreover, this could lead to tenant vacancies or rental arrears, and may even force investors to reduce their rent in order to prevent tenants from vacating and seeking more affordable rentals,” said Attie Anderson, head of Business Lending – FNB Property Finance.

But the worst hit could be struggling farmers who are already facing rising debt levels due to the weak rand and severe drought, said Dawie Maree, head of Information and Marketing at FNB Agriculture.