South African SMME Business Confidence Index Presented by: Professor Nicholas Biekpe Africagrowth Research Sponsored by: IDC

Acknowledgements: IDC- Partner & Sponsor of Indices; SABC- Partner Seda- Partner Khula Enterprise Finance- Partner Other Academic Institutions- Partners

Outline Global perspective South African perspective Why SMME Index? Limitations to Business Success Sampling Technique Methodology Sampling Distribution Index Results Conclusion

Global perspective About that 95% of companies in Australia are from the SME sector; America has the largest number of SMEs in the world; After the second world war the growth of both Japan and Germany were SME led; More tax revenue is generated from SMEs in the developed countries compared to tax from big business; SMEs create more employment compared to big business; The above implies that SMEs are, truly, the engine of economic growth!!!!!

Background It is estimated that there are more than 2.5 Million SMMEs in the country; SMMEs have a major role to play in the South African economy in terms of employment creation, income generation and output growth; It is estimated that 91% of the formal business entities are SMMEs; They also contribute between 52 to 57% to GDP and provide about 61% of employment;

Background Promotion of the SMMEs is a key element in the Government's strategy for employment creation and income generation; However, SMME development is hampered by a number of factors including finance, lack of managerial skills, equipment and technology, regulatory issues and access to international markets; There is need for investment in the SMME sector, so as to create capacity for labour absorption and output growth, as well as to improve income generation and redistribution.

Africagrowth Research Background Growth in the South African economy is underpinned by the growth and expansion of the SMME sector; Measures that accurately capture and measure developments in this sector are therefore extremely important; By measuring the attitudes and economic expectations of small business owners throughout South Africa, we measure their degree of confidence in the economy. 9/18/2018 Africagrowth Research

Africagrowth Research Why an Index? Provides a unified voice for the SMME sector; Indices have the ability to track real economic growth; There is no SMME index in the continent; It will help government, investors and policy makers to better understand the SMME sector; It will be used as a policy tool to help support the sector; Will be used as a backup to investment decisions; 9/18/2018 Africagrowth Research

Limitations to Business Success: Survey 2 Access to bank credit 8.24% Access to markets 5.21% BEE 1.34% Competition from imports 6.22% Crime 10.76% Employee costs 9.41% Govern taxes & regulations 14.45% Impact of HIV/ Aids 2.35% Operating & capital costs 12.44% Other 0.34% Procurement & supplier limitations 4.87% Shortage of skilled labour 9.24% Sufficient demand 8.40% The exchange rate 6.72%

Africagrowth Research Sampling Technique Questionnaires were sent to senior managers and owners of enterprises in the SMME sector; The senior managers or owners were asked to indicate the important factors or attributes limiting business success in their organisations; They were also requested to give their views about the current economic situation compared to the previous three months as well as to give their expectations for the business situation in the next 6 months. 9/18/2018 Africagrowth Research

Sampling Technique Economic sectors were broadly divided in three key sectors: Trade (wholesale & Retail) Industry (Manufacturing; electricity, gas and water; construction; mining & quarry and Agriculture) Services (Financial and Business Services; transport, storage & communication; community and social services; catering and accommodation)

Africagrowth Research Sampling Technique To be included in the sample, an enterprise needed to have either a fax number or an email address. The sample was drawn from a database of 17, 000 SMMEs in South Africa. This was a consolidation of databases from various sources Department of Trade and Industry (DTI). The Western Cape Chamber of Commerce and Industry and Nafcoc The Economic Development and Tourism Database for the Western Cape Invest North West and the Kimberly Business Service Centre databases Contact details were also sourced from the Telkom Yellow pages and the Brabys website. 9/18/2018 Africagrowth Research

The SMME Business Confidence Indices Methodology The SMME Index was constructed using the Diffusion Index method. The index is computed as a weighted average of the Fraction of (Up) and (Same) responses to questions in the survey. 9/18/2018 Africagrowth Research

Methodology A composite confidence indicator which measures the general assessment of present economic conditions and future expectations is also computed; For each question and industry an index is computed for both the present and future business situation; First indices were computed at the last quarter of 2005; Second indices were at the first quarter of 2006.

Sample Distribution (Province) Gauteng, KwaZulu Natal (KZN) and the Western Cape accounted for 60% of the total responses in both surveys.

Sample Distribution 1st Survey (Size 225)

Sample Distribution 2nd Survey (Size141)

Sample Distribution (Employees) The employment trend has not changed much between the 2 surveys; The bulk of the SMME business employs less than 50 employees.

Sample Distribution: 1st Survey

Sample Distribution: 2nd Survey

Sample Distribution (Turnover) Annual turnover distribution did not vary much between 2 surveys; Approximately 38% of firms had annual turnover more than 4m Rand.

Sample Distribution 1st Survey

Sample Distribution 2nd Survey

Sample Distribution (Economic Sectors) Both samples of the survey show that the Industry sector leads in the total number of respondents with a 47.8% and 48.20% percentage representation in the 1st and the 2nd survey respectively.

Sample Distribution 1st Survey

Sample Distribution 2nd Survey

Industrial Sector Results There was a general decline in SMMEs’ expectation of present outlook conditions; Apart from selling price, the SMMEs expected a decline in the employment levels, their financial situation and new orders/contracts, compared to levels in the past.

Industrial Sector Present Outlook

Industry-Future Outlook SMME expected a bleak outlook for the future; They expected a decline in selling price, decrease in employment levels, worsening of financial situation and decrease in new orders/contracts; They expected an almost 20% decline in their financial situation and order/contract acquisition.

Trade Sector Results The present outlook for the trade sector is mixed; Whilst these SMMEs perceive an increase in their employment levels, and volume of demand, they also expected significant financial problems (66% decline) and decline in selling prices.

Trade-Present Situation

Trade-Future Outlook Interestingly the trade sector is optimistic about the future situation; There are general increases in the expectation of employment, selling prices and demand volumes; The financial outlook, even though still negative, improves.

Trade-Future Outlook

Services Sector Results The 2 surveys show that the present outlook for SMMEs of the present business climate for the services sector was bleak; Apart from stock levels which were perceived to increase by a little over 10%, all other business conditions were seen to have worsened.

Services Sector Results

Services Sector Results The services sector does not show an improvement in the future over current business conditions; Future outlook for this sector shows a significant decline in business conditions, especially in the financial situation.

Services-Future Outlook

Inter-Sectoral- Present Situation In all, SMMEs in all the sectors expected an average decline of about 6% when first survey is compared to second survey.

Inter-Sectoral- Present

Inter-Sectoral- Future SMMEs in the industrial and services sectors expected a decline in the future business outlook; However, SMMEs in the the trade sector expected an almost 20% increase in future business outlook.

Inter-Sectoral- Future

Overall Present SMME BCI The overall SMME BCI shows that there was a decline in SMMEs’ expectation of present business outlook; The index dropped from 52.14% in the First survey to 48.97% in the Second survey.

Overall Present SMME BCI

Overall Future SMME BCI The overall Future SMME BCI shows a decline in SMMEs’ expectation of present business outlook; The index dropped from 64% in the first survey to 59% in the second survey, a decline of 7.8%.

Overall Future SMME BCI

Overall SMME BCI The overall SMME BCI thus recorded a decline from 58.2% in the 1st survey to 54.1% in the 2nd survey a decline of about 6%.

Overall South African SMME BCI

Conclusion The overall South African SMME BCI for the two quarters shows a decline in SMMEs’ expectation of business outlook; In all, SMMEs in the various sectors expected an average decline of about 6% in the present business conditions; The industrial and services sectors expected a drop in the future business outlook; However, the trade sector shows an increase in future business outlook;

Conclusion Thus, apart from the trade sector, (which forms a little less than 20% of the sampled firms in both surveys) the business outlook for all other sectors was disappointingly low. It also appears that one of the major sources of pessimism about business situations is the financial situation of firms. Hence financing seems to be a major constraint.