Predictability, resilient funding critical for business growth

29th January 2020 By: Simone Liedtke - Writer

Predictability, resilient funding critical for business growth

Investec for Business corporate accounts head Dr Greg Cline

Having a sense of predictability and a resilient line of funding available is critical for businesses in South Africa to grow, particularly as currency volatility and ageing debtors’ books present key challenges, says financial services company Investec for Business corporate accounts head Dr Greg Cline.

He tells Engineering News that having a level of predictability within a business involves the company’s management team, for example, examining lead times, understanding forex, taking into account forwarding, freight and clearing costs, as well as understanding how frequently customs stops are experienced, should the business be importing its goods.

The ramifications of unforeseen delays, as well as not having an adequate business relationship with customs, could have “enormous ramifications” for businesses, costing more money for storage while awaiting customs inspections or covering return fees, for example.

Having a sense of predictability, whether it be potential events or a predictable line of funding to fill monetary gaps, Cline notes, will enable businesses to “understand the total funding costs, [which businesses have] to consider within the concept of inbound supply chain, and the business as a whole”.

According to him, businesses that are considering importing goods or that want to ensure a level of stability need to ensure they have a reliable line of funding in place and that they are dealing with companies that have a strong technology platform that allows them to understand the inbound supply chain.

This will assist businesses to understand their working capital situation and structure their debt appropriately, so that it is not too expensive and does not become an 'emergency fund', while simultaneously having foresight into the way that businesses are trading internationally, “because we’re anticipating a bumpy ride in the near future”.

Cline suggests that businesses work with a clearing and forwarding agency and with reputable supply chain management companies to prevent unforeseen delays.

Should unforeseen delays occur when importing goods, companies should be looking towards data analytics to evaluate its inbound supply chain cost and timing so that it can determine what will be “the most profitable way to get [its] goods from a foreign supplier into the warehouse”.

Taking into account that South Africa’s trade surplus widened to R12.3-billion in November 2019 – meaning that there were more exports than imports – Cline points out that in order for businesses, and the economy, to grow, a downgrade of South Africa’s rating would need to be avoided, as do further power supply interruptions by State-owned power utility Eskom.

Business confidence also needs to be restored.

Cline notes that, with expectations that South Africa’s gross domestic product is not likely to be higher than 1% this year, and the fact that load-shedding remains a concern for the foreseeable future, the country may well have its ratings downgraded to junk status.

An investment grade downgrade will lead to a reallocation of foreign funds to other investment-grade emerging markets.

“If there is an outflow of foreign direct investment (FDI), . . . there is a lower demand for the rand, and a higher demand for foreign currency. The rand will weaken, which will potentially lead to increased inflation, while imported products become more expensive,” he elaborates.

The cost of imports will increase because it will factor in a higher petrol price, for example.

“If you’re downgraded to junk status, it’s a difficult situation because it precludes a lot of FDI and that’s an important factor when it comes to large infrastructure projects that need to be funded, because it’s those projects that are key to creating jobs in high volumes.”

Despite the looming potential downgrade by ratings agency Moody’s, and South Africa’s numerous woes, Cline is still positive about the business environment, stating that he believes South Africa has the ability to “service a global economy through, among others, its mining, automotive and agriculture sectors”.