Rate cut a fillip for small business

Johannesburg - The Reserve Bank's repo rate cut will breathe new life into black economic empowerment (BEE) investors and small- and medium-sized enterprises (SMEs), many of which have been collapsing under the weight of debt and stunted economic recovery.

Chia-Chao Wu, deputy chairperson of BEE ratings agency Empowerdex, is confident that the half percentage point cut will spur growth, slash interest repayments and improve the coffers of empowerment companies.

"Their (BEE firms') underlying investments are likely to be more profitable, which means they will earn more dividends.

"I think we are also likely to see more BEE transactions as they will be more financially viable at lower interest rates," Wu said.

In the wake of the global credit crisis, many BEE investors saw the value of their JSE-listed investments shrink while dividends took a nose dive. The majority of empowerment deals are structured in such a way that dividends are used to repay the debt incurred when the stakes are bought.

The interest rate cut will also benefit SMEs, whose sales took a knock after cash-strapped consumers spent less.

Mncedisi Xego, the chief executive of small business lender Royal Fields Finance, said the cut would give SMEs a greater chance to access funding.

"When we assess SMEs, we look at their cash flow. The interest rate cut will boost the cash flows of SMEs and improve their ability to repay loans. It will be easier for them to access finance at the current rates," Xego said.

On Thursday, Reserve Bank governor Gill Marcus reduced the repo rate by 50 basis points to 6%, encouraging commercial banks to follow suit by cutting prime lending rates to 9.5%.

The decision to cut the repo rate was taken to kickstart the economic recovery and counter the stronger rand, which has hurt exports. The repo rate is the rate at which the Reserve Bank lends cash to commercial banks.

The country's main business chamber, Business Unity SA (Busa), said it expected growth to remain sluggish in the second half of the year despite the rate cut.

Busa deputy chief executive Raymond Parsons said: "While a further cut will not in itself create a stronger recovery, it helps to strengthen consumer and business confidence at an important stage in the business cycle.

"Busa believes the growth outlook remains modest and on current economic evidence may not reach 3% for 2010 as a whole."

While the rate cut is expected to pump a bit of cash into the pockets of homeowners, no buying frenzy is anticipated.

FNB property strategist John Loos has warned potential buyers not to think property owning is going to be more affordable now that interest rates are at their lowest level since the middle of 1974.

He said an increase in municipal and utility rates, driven mainly by Eskom's electricity tariff hikes, would push up housing-related costs.

In Gauteng, homeowners were also faced with a major increase in transport costs as many of the province's freeways were set to become toll roads.

"It is important not to be lulled into a false sense of security due to very low interest rates. What the Reserve Bank is currently giving, other authorities are taking back," said Loos.

Luthando Vutula, the head of Absa's home loans unit, said the latest rate cut had reduced mortgage repayments by as much as 31% since late 2008, when the prime interest rate was 15.5%.

"Back then, the monthly repayment on, for example, a mortgage loan of R500 000 over a 20-year term was R6 769.

"After the latest rate cut, the repayment on such a loan will amount to R4 661 per month, which translates into a cumulative saving of no less than R2 108 since late 2008 before rates entered the downward cycle," said Vutula.

 - City Press

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