Many local entrepreneurial businesses have the potential to thrive under pressure. However, in the midst of a volatile economy small and medium enterprises (SMEs) do require a particular level of certainty to flourish and implement growth strategies.
2016 was a particularly disruptive year for the entrepreneurial landscape, with trust and confidence in the economy eroded by political uncertainty, says Ben Bierman, MD of Business Partners Limited, who was speaking during Global Entrepreneurship Week held from the 14th to the 20th of November.
“SMEs are more vulnerable to uncertainty, so it isn’t surprising that recent events, such as the insecurity of the finance minister position and a low growth environment, have plagued the South African economy over the past year, and have hindered entrepreneurial activity in the country.
“For example, we have witnessed a number of approved investment transactions not going ahead due to the entrepreneur wanting to hold back on their expansion plans. Entrepreneurs are opting to rather make their business investment decision when there is more economic certainty,” says Bierman. He adds that the looming ratings decision is also ultimately an assessment of investors’ confidence in the South African economy. “Investors need to have trust in the country’s ability to repay our debts as a whole. A downgrade has the potential to send the entire economy into a downward spiral, with a number of negative impacts for SMEs.”
Referencing the latest South Africa 2015-2016 Global Entrepreneurship Monitor (GEM), released in early 2016, Bierman notes that the country’s early stage entrepreneurial activity rate was reported at 9.2%, just half that of the regional average for Africa. “According to the monitor, the three greatest constraints hindering entrepreneurial activity in South Africa – since the country first participated in GEM in 2001 – includes government policy and bureaucracy, access to finance, and education and training.”
Over the past year, the sequential impact of political and economic uncertainty has put pressure on SMEs’ customers, ultimately affecting the perceived level of entrepreneurial opportunities in the economy, explains Bierman. “SMEs generally have three clusters of customers, namely government, corporate South Africa, and consumers – sometimes a mix of all three. With consumers under increasing pressure in terms of disposable income, corporate South Africa sitting on approximately R 700 billion which they reportedly cannot invest due to policy uncertainty, and the government’s fiscal prudence under a large amount of pressure – the growth prospects of SMEs in general is being impacted, along with their continued survival and the attractiveness and entrepreneurial activity.”
Government therefore needs to create an environment which is more conducive to SMEs formation and growth. According to the recently released 2017 Global Entrepreneurship Index from the Global Entrepreneurship Development Institute (GEDI) and Global Entrepreneurship Network, improving the conditions for entrepreneurship by 10% could add $22 trillion to global GDP, as institutions that support entrepreneurs also positively impact the economy as a whole.
Bierman says that even though SMEs are a key driver of economic growth, an economy isn’t stimulated by only planting a small business seed in the middle of it. “An economy needs other drivers for growth, such as government infrastructure spend or big corporate expansions. With the lack of such initiatives in the last year, local SMEs have suffered as a result.”
Looking ahead into 2017, Bierman is more optimistic about the economic climate. “If one compares the current situation to more-or-less the same period last year, South Africa does seem to be in a better position. Commodity prices are at higher levels, GDP is growing albeit at very low rates, inflation appears to have stabilised and the current interest rate increase cycles seem on hold, all of which contribute to a better outlook for 2017.”
He adds that South Africa improved its ranking by three positions from 55 in 2016 (out of 138), to 52 among the 132 countries analysed in the 2017 Global Entrepreneurship Index. (The index measures a country’s entrepreneurial ecosystem).
“In order to continue supporting South Africa’s entrepreneurs, we need to collectively make a concerted effort to improve entrepreneurial perceptions and the attractiveness of entrepreneurship as a positive career-choice for graduates and skilled individuals. This can be done by improving access to finance and markets, and providing improved training and support for early-stage entrepreneurs,” Bierman says.