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SMMEs have not been spared the downturn in the company profit cycle in recent years, as calculated from South Africa’s national accounts data. The published production, distribution and accumulation accounts do not show the profits of micro, small and medium enterprises (SMMEs) separately. But we do have earnings data for the listed small capitalisation stocks, which confirm a profits downturn.

At the same time, small capitalisation stocks have underperformed against the broader JSE Index since 2017 (see the chart below).

Meanwhile, the South African economy recorded zero growth in real GDP in the year to 1Q19 (or -3.2% seasonally adjusted and annualised). The outright fall in domestic final demand (-1.1% seasonally adjusted and annualised) in the quarter is especially concerning. This is not an environment in which SMMEs can be expected to thrive.

Small Cap Index relative to JSE All Share Index

Source: I RESS, Sanlam

At least, we can point out, economic activity in the first quarter was partly suppressed due to electricity outages. However, even though it seems reasonable to expect something of a recovery in the economy in the remaining quarters of 2019 (provided monetary policy easing amongst the world’s central banks can counterbalance the growing list of threats to global growth), it is difficult to see the South African economy regaining strong, sustained momentum in the foreseeable future.

Amidst depressed economic conditions the SMME sector is often alluded to as the potential catalyst for increased income and employment growth. Various measures have been introduced over a number of years in an attempt to spark development of local small businesses, including changes to the tax structure and state expenditure procurement legislation, and attempts at supporting the commercialisation of ideas through government assistance lent to venture capital programmes.

Determining the relative success of these ventures is no easy task, but it seems fair to argue that the expected growth outcomes have not been realised.

It is also debatable whether targeted interventions will achieve the desired result. A more ‘profitable’ route would be, at least initially, to focus on creating an enabling macro-economic environment.

I suggest one of the most important elements of an enabling framework would be the reversal of South Africa’s slide in the World Bank’s Ease of Doing Business Index. Between 2008 and 2018 South Africa deteriorated from 35th in the world to 82nd. This speaks to the ability of SMMEs to compete.

An analysis of the reasons for the deterioration of South Africa’s position in the index goes a long way to identifying what needs to be done. According to the World Bank, South Africa’s rankings for factors such as the number of start-up procedures new businesses must comply with (134th), getting electricity (109th), registering a property (109th), obtaining construction permits (96th), trading across borders (143rd) and enforcing contracts (115th) detract from its overall ranking of 82nd.

At least, at the same time, South Africa is rated relatively better for factors such as getting credit (73rd), paying taxes (46th) and resolving insolvency (66th). That said, these positive developments have not been enough to prevent South Africa’s sustained slide in the rankings over the past decade, as the rest of the world moves forward.

Former US President, John F. Kennedy, once famously said: “… ask not what your country can do for you; ask what you can do for your country”. The thing is that we are asking our entrepreneurs to build small businesses in the current restrictive environment, which is asking a lot.

Encouragingly, though, the National Treasury, in addition to President Ramaphosa, recognises the potential which can be unlocked by reversing South Africa’s slide in the Ease of Doing Business Index specifically. Indeed, the July 2019 Budget Vote speech by Minister Tito Mboweni noted, amongst other factors, the need to “streamline and make government regulations more effective, while making it easier for businesses to register, innovate, export and create jobs”. Further, the Minister argued, “If we are to right the ship, we need to focus on those actions and policy choices that will produce strong positive results for economic activities, through attracting investments and making it easier for South Africans to operate businesses, especially entrepreneurs.”

Overall, many factors determining the ease of doing business are administrative in nature and represent low-hanging fruit. They can be addressed relatively easily if the will to do so is present.

Minister Mboweni’s speech and President Ramphosa’s recent State of the Nation Address, suggest there is, indeed, intent to address the issue. If so, we could be on the cusp of a better operating environment for SMMEs, which would be enhanced if, at the same time, we could find a way to address the barriers to entry which small businesses typically face. Here’s hoping.

Written by Arthur Kamp, Investment Economist, Sanlam Investment Management

 

 

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