Agriculture is a capital intensive industry with a national agriculture debt in access of R 160 million, the reduction of the interest rate by 25 basis points is therefore a welcome relief to farmers and producers who are still recovering from the aftermath of the drought of two years ago.
During a drought, producers have less or nothing to take to the market and derive some income from, however, they still have to carry the cost of holding farm assets and are thus unable to meet their debt repayment obligations. It may lead to further indebtedness as they are forced to borrow more to maintain their living and operational requirements.
Paul Makube, Senior Agricultural Economist at FNB Business says; “The reduced cost of borrowing will incentivize farmers to review their investment decisions in terms of purchasing new machinery, equipment or restart deferred projects such as expansion of orchards.
This will also improve the profitability of enterprises with high capital outlays such as in poultry, feedlots and pork. The combination of falling inflation and lower interest rates positively affects the expenditure on farm inputs in terms of reduced production costs, thus improving profit margins.
Jesse Weinberg, Head of the SME customer segment at FNB Business says:
The South African Reserve Bank’s (SARB) decision to cut interest rates by 25 basis points will offer timely reprieve to Small and Medium Enterprises (SMEs) that may be servicing unsecured debt, says Jesse Weinberg, Head of the SME customer segment at FNB Business
“Whilst the economy is showing positive signs that could lead to better growth, SMEs should plan ahead to ensure that they use this rate cut reprieve to put their businesses in a position to capitalise on the benefits of any economic upswing,” he says.
Weinberg outlines key benefits of a rate cut for SMEs:
- Lower cost of servicing debt – SMEs that may be servicing unsecured debt such as loans will save on their monthly repayments, enabling them to redirect the surplus funds into other areas of the business.
- Cash flow boost – a small business’ ability to maintain reasonable cash flow puts it in a better position to succeed and grow.
- Room to save –Access to credit is vital for any small business, however it needs to be complemented by a culture of saving, and redirecting the savings from a rate cut could make a major difference.
The interest rate cut by the SARB was yet another dose of good news for South Africa, following the announcement by Moody’s to retain SA’s investment grade with a positive outlook.
Weinberg says an improving economic outlook is a welcomed boost for SME after a sustained period of low growth.
“The last three years have been really tough for small businesses but despite the fact that we are not definitively out of the woods yet, there is a lot that business should be positive about. We believe that a vastly improved operating environment will significantly help the growth of small businesses in South Africa,” concludes Weinberg.