CAPE TOWN – Despite a strengthening rand and slight recovery of the oil price, the South African Reserve Bank announced that the repurchase rate will increase by 25 basis points to 6.75 percent, effective from November 23.
This increase in interest rates – which pushes the prime lending rate up from 10 percent to 10.25 percent – is the first rates hike that South Africa has seen since March 2016.
According to David Morobe, regional general manager at Business Partners, the impact that an interest rate hike has on small and medium-sized enterprises (SMEs) is two-fold. “Higher interest rates will impact businesses directly as debt will become more expensive, but it will also have an indirect impact on businesses by negatively impacting the spending habits of consumers.”
Focusing first on the direct impact of higher interest rates, Morobe points out that almost all small businesses have outstanding debt in one form or another. “Simply put, when interest rates rise, any debt owed by the business will become more expensive. This will have an immediate negative impact on the business’ ability to service their existing debt, as well as their cash flow.
“As SMEs typically have quite a limited cash flow – especially in the early days of operation – the additional cash required to pay off the more expensive cost of debt may also result in some cash flow shortfalls, which may have a knock-on effect on a business’ ability to pay their suppliers and operational costs,” said Morobe.