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Junk status signals hard times for small business

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Cape Town - The downgrades from ratings agencies will likely impact infrastructure projects and lead to a decline in procurement from small business, according to AHI president Bernard Swanepoel.

The small business representative organisation said although small and medium businesspeople are a tough and enterprising group, they will have to be resilient in the face of the downgrades from ratings agencies.

“It will take us years to recover,” said Swanepoel.

With South Africa's credit rating now downgraded to sub-investment grade, there will be pressure on the rand, significantly higher inflation, and an increased difficulty in servicing government debt, said the AHI.

Fitch's downgrade to BB+ from BB- on both foreign and local currency debt follows that of S&P Global Ratings which also cut South African foreign debt to "junk" status.

The agencies’ move followed the dismissal of finance minister Pravin Gordhan and his deputy Mcebisi Jonas and the resultant perception that this would probably be followed by a change in fiscal and monetary policy.

"This is government shooting itself in the foot,” said Swanepoel.

The AHI warned its members that a weaker rand and other factors resulting from the downgrade is almost certain to lead to a rise in the cost of servicing government debt. This will mean less money for critical services such as health, education, housing and sanitation.

It said in particular, fewer infrastructure projects will mean that procurement from SMEs will decline. In the current political climate, an increase in service delivery protests cannot be excluded, said the organisation.

“From a business point of view, it is going to make it difficult to hedge currency exposure and it’s going to make borrowing money more expensive," said Swanepoel.

He added that the downgrade will hit the poorest and the most vulnerable the hardest. "We will certainly see higher prices in a time where many consumers are already struggling with high levels of debt and input costs are rising."

“It is important to make the point that this ‘own goal’ demonstrates how corruption is more than just the abuse of power for gain. It has real consequences. The coming hardships are caused not by poor business decisions or reckless management, but by a government putting self-interest over national interest."

The AHI’s advice to its members is to take precautionary measures where possible to ensure that they, their staff and their businesses are ready and able to survive whatever challenges may come their way in the next few years.

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