Although the crisis in Europe and the United States might seem far away, they are very, very close. South African CFOs are very aware of that, proves the 2011 Deloitte CFO Survey. “South African CFOs are cautious about the future, perhaps wisely so.” The survey reveals that while the 2009 recession may be over, CFOs are only dipping their toes into the growth pool, while keeping a careful eye on costs and margins. The aftermath of the financial crisis has brought with it an additional regulatory burden which is at risk of stifling growth.
CFOs believe that modest economic growth is likely, but they are more circumspect regarding their own company outlook. Only 12% of CFOs expect company performance to be significantly better beyond 2013, even though 48% think that the economy will be operating at a much higher level at that stage.
Concerns over rising costs
From having followed highly defensive strategies in 2009, CFOs are now opting for a balance of defensive and growth business strategies over the coming year. Not fully confident that the worst is over, CFOs are watching cash flows carefully. The primary business risk is considered to be margin deterioration due to input cost pressures, with 83% of CFOs citing it as a risk. This is especially important to the retail and wholesale industry, the mining sector, and technology, media and telecoms companies where 100% of the CFOs surveyed report higher electricity costs to be a risk. The larger companies, in particular, are concerned by margin erosion.
With producer inflation rising at 8.9% for July 2011, further cost pressure on margins can be expected. Additional strain is likely to emanate from continued soaring electricity price hikes, above inflation wage settlements, a weaker rand and rising transport costs. The impact of continually rising electricity prices was rated fourth as a risk factor, driven by the heavy power users such as mining and manufacturing.
There has been a large swing in interest rate expectations from 2010, when businesses were looking to interest rates to remain largely unchanged. Now, 83% of CFOs are looking to a modest hike (up to 200 basis points) in short-term interest rates over the coming 12 months. While these expectations were uniform across all sectors, smaller businesses were more convinced that rates would remain unchanged than larger ones
Cheaper capital
Given the current low repo rate, capital and funding has become significantly cheaper. This trend appears to be consistent across industry sectors and business size, although the construction industry and the financial sector still view capital as being too expensive. Only 36% of the CFOs feel that the cost of capital is too high with 45% being of the opinion that the cost is fair.
In addition to becoming cheaper it appears that capital has become a little easier to access for some, most notably large mining and retailing companies, with 77% of CFOs now believing that capital is readily available to their organisations. The construction sector is, however, still finding funding to be a real constraint to expansion and new projects, in spite of the overall better conditions reported by CFOs.
At the micro-economic level, concerns centred on industry regulation (46%), competitiveness (39%) and the skills shortage (50%). Larger companies (in excess of R20bn) find industry regulation consuming. The financial sector is overwhelmingly absorbed by the intensification of regulation which is threatening to stymie the industry and could aggravate the rising the cost of doing business. For the mining industry, regulation is also a huge concern. This risk is supported by continuous discussion conducted mainly through the press on the subject of nationalisation with key stakeholders adopting seemingly different standpoints.
Expansion into Africa is seen as a key source of growth with 73% of companies indicating a move northwards and most of them planning to do so imminently. With its large, youthful population and forecast above-average growth rates, Africa is seen as the last frontier, particularly in the consumer sectors as well as infrastructure development. For some companies this is about achieving economies of scale and for others it means a dramatic extension to their markets. Within this trend there is a clear shift in attention to East and West Africa.
Stay connected, up to date and in the loop on what is happening in South African finance by subscribing to our newsletter and following us on Twitter.
