Deloitte has released a report that factors in the impact of inflation and interest rate increases — what it calls “the squeeze scenario” — and how it affects the profitability and debt capacity of listed companies in 10 countries across Africa, including SA.
This is captured in the Deloitte Stability Index 2023, which includes how market pressures such as inflation, high borrowing costs, high debt servicing costs, margin erosion and slower moving inventory affect company bottom lines and their ability to service debt.
Africa turnaround and restructuring leader at Deloitte Jo Mitchell-Marais said in business the term “squeeze” can be a period when borrowing is difficult, or when profits decline due to increasing costs or decreasing revenues.
She said the record-high inflation in 2022 not only resulted in increased input and overhead costs squeezing profit margins, but also that more cash was required to sustain business operations. This is while central banks accelerated their interest rate hikes to counter inflationary pressures.
“High inflation and interest rates may put highly geared sectors such as power and real estate under strain, while margin-pressured sectors such as healthcare and hospitality could also feel the pinch,” Mitchell-Marais said.
She said high borrowing costs lead to increasing debt servicing costs that will decrease consumer spending, capital expansion and be drag on leveraged business cash flows.
“This is why it is important that companies factor in the squeeze scenario so that they can take action sooner rather than later,” she said.
Country-specific findings show that consumer-focused sectors have the greatest sensitivity in SA. Tightening household budgets and rapidly changing consumer preferences make retail and consumer products companies among the most at risk, and with them related sectors such as real estate and construction.
“June 2023 saw consumer confidence in SA reach its second-lowest point since democracy. When the drivers behind this, inflationary pressure and rising interest rates, are modelled in the squeeze scenario, it is unsurprisingly consumer-focused sectors that show the greatest sensitivity,” Mitchell-Marais said.
For Nigeria, Mitchell-Marais said the instability caused by inflation, fuel shortages and queues for currency at banks led to an acute cost-of-living crisis. She said runaway inflation and historically high interest rates are felt most in the tourism and hospitality industry, as well as the retail and consumer products sectors where already narrow margins could be further eroded.
“It is no wonder that the sectors at risk are those exposed to consumers such as retail, consumer products and tourism,” she said.
The view from Kenya shows listed companies in that country face similar challenges.
Inflation and interest rates reached heights last seen in the aftermath of the 2016 drought. This crisis has an outsize impact on highly geared sectors such as the power and utilities industry and the industrials and construction sector.
The cost-of-living crises abroad also kept Kenya’s tourism and hospitality demand weak. All this while the construction, real estate and tourism sectors are yet to recover from the pandemic, and are expected to remain in the doldrums in 2023.
“Distress in retail and consumer products is emerging. This is likely to be accelerated by the tax hikes contained in the finance act voted in during June 2023,” Mitchell-Marais said.
The outlook for 2023 is not positive for SA, Kenya and Nigeria, where, according to Deloitte, SA will continue to be hindered by load-shedding, the country’s high unemployment and policy uncertainty.
For Nigeria, Deloitte cited election uncertainty, falling oil prices and low consumer confidence as issues that will most impact companies.
Kenya’s post-election bounce, investment in infrastructure and climate change are highlighted as main risks.
Deloitte said CFOs should prioritise defensive strategies, such as cost reduction, cash flow management and deleveraging to mitigate against an uncertain economic environment.
Mitchell-Marais said other defensive strategies companies should use include identify opportunities for “quick wins”, cash release and include working capital cost in project or customer financial assessments to deal with the challenge of margin erosion and dampened demand resulting in slower moving inventory.
Companies should accelerate “fix, sell or close” decisions and act fast to resolve underperformance while also scanning for targets with potential synergies to deal with pandemic and geopolitical tensions that have caused financial and operational stress across many industries and value chains.
She said to deal with the challenge global supply chain pressures have contributed to inflation, companies should map out supply chains and ascertain ability of suppliers to fulfil orders.
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