BUSA: Day Zero looms for small business in South Africa unless we act now
By Cas Coovadia
JOHANNESBURG - President Cyril Ramaphosa’s economic recovery plan includes a focus on growing small business, the backbone of the economy and the sector where most of our workers are employed.
He also warns that the coronavirus will be with us for some time, that the World Health Organisation says a new wave of infections may occur, and that measures to control the spread of the virus will have to be intensified.
That combination may not be good news for small businesses. Despite the president’s very welcome undertaking to speed up relief payments to those affected, and to include small business in as many aspects of the planned economic recovery as possible, the coronavirus pandemic has already done massive harm to the small business sector.
The reality that the government and private sector relief organisations must face is that the ongoing economic devastation caused by Covid-19 is so great that we are not going to be able to save all of the businesses and the jobs that they provide. That in turn means a focus on the small businesses most likely to survive now and thrive in the future, either because of the type of business or the strength and entrepreneurship of its leaders.
It is a form of economic triage – choosing those with the best chance of recovery. State and private sector support organisations do not have unlimited funding, and they will have to decide which relief measures work best, which businesses to help and which to let go. It will be tough, because jobs and livelihoods are involved, and hardship is inevitable.
It will be necessary, because without this triage to prioritise those most likely to benefit, huge amounts of money will be wasted, and thousands more jobs will be lost than if the businesses most likely to survive and grow, get the most support.
Propping up poor businesses and weak management will put the whole sector at risk because it seems likely that things will worsen.
The indications are that there is more pain ahead.
While South Africa’s Covid-19 level 1 easing of restrictions might bring a sense of a return to normal, we are far from it.
The sobering reality is we haven’t seen the worst of it when it comes to the economy – and the blood letting is greatest in small business which by one estimate used to employ 47 percent of the workforce and contribute 20 percent of gross domestic product.
Statstics SA already tells us that 2.2 million people lost their jobs in the second quarter of the year, but that too is the tip of the iceberg.
The government’s recovery plan says estimations are that the economy will contract by about 7 percent for the year 2020, with a potential loss of 3 million jobs affecting both large businesses and SMMEs.
We are in a serious economic crisis and we are not yet out of the lockdown crisis. We must plan on the assumption that there will be a second wave of infections, exacerbating the economic impact as has happened elsewhere. This will only serve to deepen our woes.
This is a time for cold, hard decisions. Compassion is needed, of course, but dispassion too. We may have to accept that not everything can be saved. We must focus on saving what we can before more businesses go to the wall. This is one of the ways to create the right conditions for new economic growth.
Some of this triage in prioritising relief recipients is already happening. The Sukuma Fund, with which I am associated, has been focusing only on formal small businesses, and within that sector on those likely to survive the crisis, in order to maximise its impact with the relief funding it has available. It has provided nearly R1 billion in relief funding to these small businesses, saving some 32 000 jobs.
The banks administering government’s R200 billion loan guarantee scheme have also perforce been selective, perhaps for different reasons, which may be why only R16 billion of that money has been disbursed.
There have been calls for a relaxation of the conditions for these government-backed loans. Given the recession and the ongoing need for financing of SME’s, there is an opportunity for government’s relief fund to partner with Sukuma for the distribution of the more than R180 billion it still has available to lend to small businesses.
Despite the president’s job-creation focus, the short-term outlook for small business is not good. The Organisation for Economic Co-operation and Development (OECD), an international policy think tank, has published a detailed study on the impact of coronavirus on small business worldwide, and the policies that various countries have implemented to save jobs and businesses.
The OECD estimates that global economic contraction will rise to 7.8 percent from 6 percent on the back of a second wave of coronavirus infections. South Africa is likely to suffer more than the average – the OECD now estimates that the South African economy will contract by 11 percent this year thanks to the pandemic.
Those are frightening statistics. They tell us that we must plan now for continuing economic misery ahead.
The dark clouds have some silver linings. The SME sector is part of government’s recovery plan, and small businesses will benefit in several ways. There will be a boost from the focus on localisation, which includes local procurement, import substitution and support for local businesses, from manufacturing to township and village economies.
This will ease the pain for small businesses, but it will not make it go away with the economy in deep recession and jobless numbers continuing to rise. A recent StatsSA study surveying 700-odd businesses revealed that 40 percent of entities were unable to continue operating and 54 percent would close without turnover for two months.
The key to saving small businesses is being prepared and able to act swiftly. As a country our record on acting fast to keep small business going has not been a sterling one despite some exceptions, such as relief organisations like the Sukuma Fund.
The OECD study of 160 countries provides evidence that more focused strategies of support can be more impactful. Without a proper focus on trying to save viable businesses, a country could incur significant fiscal cost for a far more limited impact – i.e. spend worth 1.1 percent of GDP could save more businesses and jobs than almost double that amount done with less of a laser focus on who might benefit.
The small business sector is in crisis, and a second wave of coronavirus infections will make things worse. We may have to accept that not all ships will float when the economic tide starts to rise. What is important is that we start getting the tide to rise, and that means supporting businesses that will survive and create jobs.
Cas Coovadia is co-convenor of Business For South Africa (B4SA), head of Business Unity South Africa (Busa) and a member of the Sukuma expert advisory panel.