13/10/2007 14:27 - (SA)
Rates rise affects BEE - experts
Bongolethu Futuse
BLACK economic empowerment entrepreneurs face tougher times as the rising interest rates increase their debt servicing costs and make raising new loans more difficult.
"The latest round of repo rate increase is disastrous to empowerment.
"It is not crunch time yet but the developments warrant watching," said Sandile Zungu, the executive chairperson of Zungu Investments Company.
Zungu's comments came after the Reserve Bank announced a 50 basis points increase in the repo rate to 10.5%, prompting banks to raise their prime lending rates to 14% this week.
Interest rates have been hiked up by a total of 350 basis points since last June.
"The new hike is almost a death knell for the growth of BEE, especially for entrepreneurs at the entry level.
"The unintended consequence of this is that black entrepreneurs will continue to be marginalised by lending institutions," said Zungu.
Since the inception of the National Credit Act (NCA) in June, it has been more difficult for many people to access any form of credit.
This is because the NCA puts an obligation on credit grantors to conduct a vigorous assessment before credit is granted to applicants.
Sydney Mhlarhi, the chief investment officer of Makalani Holdings, a mezzanine financing company that provides funding for BEE, said the rate increase will see entrepreneurs only able to access lower amounts of debt.
"The move is likely to erode the capacity of entrepreneurs to borrow more funds," Mhlarhi said.
"What is likely to happen here is that a lot of entrepreneurs will not be able to access the amounts of debt they want.
"Instead, many will afford a lot less than they would in an environment where interest rates were lower."
Since hikes in rates raise interest payments on the principal debt, Mhlarhi said entrepreneurs may now be faced with a sad situation where they had to pay higher instalments on their debts.
For instance, on a R100 million debt at prime (14%), entrepreneurs will be required to pay R1.5 million more a quarter compared to before this week's increase. BEE companies usually repay their debt obligations per quarter.
Mhlarhi said the impact may vary from one case to the other.
"Some will suffer more than others," he said.
He makes an example of entrepreneurs who operate in the business of selling cars and those who import their products.
Car dealers have seen vehicle sales drop because of the high interest rates and the NCA.
He said the drop in business would make it difficult for entrepreneurs who are selling cars to service their debt.
In contrast, entrepreneurs who import goods may be able to service their debt easily because of the strengthening of the rand.
Zungu said at the top end of BEE, players who clinch deals worth billions of rands will also feel the pinch of the rate hikes.
"It will also mean that debt is no longer easily available for them too," he said.
Malungelo Zilimbola, the managing director of Mazi Capital, a hedge fund firm, holds a divergent view.
"I really don't buy the story that the current interest rate hike will have a negative impact on BEE entrepreneurs," Zilimbola said.
"This (high interest) environment will not disadvantage entrepreneurs who want to raise BEE finance.
"At the moment, economic growth is strong and business confidence is high.
"There is a positive sentiment out there from both lenders and borrowers about this economy," Zilimbola said.
The economy has been growing at an annualised rate of 4.5% in the second quarter of this year.
"Funding institutions are quite keen on lending and borrowers take more debt because they are confident about the economy."
He said another reason borrowers had a positive sentiment on the economy was that interest rates were expected to come down next year.
"Both lenders and borrowers would be confident to borrow based on those positive economic prospects," Zilimbola said.
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