SME confidence up, but not all plain sailing ahead

Against a challenging economic background, broad small business confidence indicators have exhibited a unanimous quarterly uptick. This was revealed in the third quarter 2018 Business Partners Limited SME Index – a survey measuring the attitudes and confidence levels of South African small and medium enterprise (SME) owners.

SMEs’ confidence that their business will experience growth in the next 12 months rose by 7 percentage points from the second quarter to 77 percent, a year-on-year increase of 5 percentage points was reported. This is likely driven by the quarterly boost in confidence that SMEs have in the local economy being conducive for business growth (up by 10 percentage points quarterly and 5 percentage points year-on-year to 58 percent), as well as their improved confidence that access to finance will become easier.

Commenting on the Index, Mark Paper, Chief Operating Officer of Business Partners Limited (BUSINESS/PARTNERS), says that while the recent boost in confidence is in line with the positive gross domestic product (GDP) data for the third quarter, businesses should not become complacent.

“Recent GDP data for the third quarter, released by Statistics South Africa, revealed that the economy has grown by 2.2 percent quarter on quarter, signifying a positive economic shift. However, with SMEs indicating that cash flow is expected to be their biggest challenge over the next six months, it is vital that they keep their finger on the pulse and plan ahead for any unexpected challenges.”

Paper refers to the costly hit of fuel hikes as a perfect example of a challenge that caught many SMEs off-guard this year, impacting their business operations considerably. “The Index reveals that 68 percent of SMEs said that the record-high fuel hikes significantly hindered their company’s growth plans for the next 12 months and only 13 percentage points anticipated these increases and planned accordingly.

“The reality is that the South African economy is struggling and since 2019 is an election year, we should expect some uncertainty during the first half of the year as government shifts from some project implementation and policy decision-making to electioneering. As such, SMEs need to learn to expect the unexpected or, at the very least, ensure that they are in a financial position where they can ride out a similar scenario in the future if need be,” he explains.

Interestingly, Paper notes that South African consumers are not feeling as optimistic as SMEs, which may throw a spanner in the works. “While SMEs are feeling confident that things are getting better, the recent FNB/BER Consumer Confidence Index revealed that sentiments amongst consumers deteriorated significantly during the third quarter of 2018, with the index dropping from 22 in the second quarter to 7 in the third quarter.

“A key indicator for the overall health of the economy, consumer confidence usually rises with economic growth. This is because when consumers are more confident in the economy, they tend to spend more and, as a result, businesses are able to prosper,” Paper explains.

This disconnect between consumer and business confidence, signals a degree of uncertainty, he says. “While the improved level of SME confidence over the third quarter is by all means warranted, it is vital that businesses take action to ensure that their positive sentiment turns into reality.

“With the country’s unemployment rate having risen to 27,5 percent in the third quarter, we need the public and private sector to support SME growth now more than ever in order for them to absorb this cohort of the population. On the other hand, SMEs should keep a close eye on cash flow and be prepared to handle any unexpected emergencies that may arise over the next six months,” Paper concludes.