Tue, 22 Sep 2020

In just over 72 hours, South Africa will officially move into Level 3 of the national lockdown. The move from Level 4 has been demanded by many sectors of society, business and politicians. The motivations for the demands have varied across different constituencies.

For the business sector, the demand has been premised on internal and universal considerations. The longer the lockdown endures, the bleaker the prospects of businesses remaining viable. When the history of this uncertain age is written, each business will be a story of three eras - the era before the lockdown; the lockdown period; and the immediate aftermath.

For all South African businesses, the pre-lockdown era will be a story of seeking to thrive under challenging macroeconomic fundamentals. The high unemployment rate; the stagnant economic growth and the multiple downgrades; made running a business in South Africa a challenge.

For small businesses in particular, these factors left some of them operating on thin margins and just one adverse variable away from going under. In spite of that, those that had managed to thrive had learnt to manage the process of keeping their doors open.

But the lack of deep capital reserves meant that any disruption to business escalated the existential risk on an ongoing basis. For bigger businesses, access to capital reserves and well-capitalised shareholders meant that the sense of anxieties were not at the same level as small business. But with big business presence comes bigger expectations from shareholders and other stakeholders.

The unifying variable between big and small business, is that they all need an economy to keep moving in one way or another. The lockdown era represented a disruption that made no distinction in size and profile.

Rather, the distinction became a matter of essential versus non-essential services. This distinction, however, was premised on the basis of healthcare considerations primarily.

This meant that even well-capitalised businesses were not guaranteed to be classified as essential. Big businesses with business models that are primarily dependent on foot traffic as a direct and indirect driver of income, felt the pinch much more than businesses that are less reliant on this variable. An example of such a business is the commercial property sector.

This week the country's biggest commercial property company - Growthpoint - reported that it collected less than half its normal rentals on the retail portfolio in April. This portfolio is exposed to shopping centres like the V&A Waterfront.

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Crucially, such shopping centres themselves have exposure to other sectors that fall outside the ambit of essential services. But Growthpoint has the benefit of a diversified portfolio which cushions it from the impact of the lockdown to some degree. Comparatively, a smaller player with exposure to just the retail side for example, would not be able to rely on other parts of the business to reduce the impact.

The challenge for big businesses like Growthpoint, is the question of what support can be provided to its tenants in particular, in order to ensure that they are still viable clients after the lockdown. The offering of rental holidays and deferrals in payments; is an important concession that must be considered by other business sectors.

The big businesses with strong balance sheets have a longer resilience timeframe between a loss of income and a loss of viability. Their clients, however, are an accumulation of smaller balance sheets with a shorter resilience period.

Leaving them to confront the vagaries of the market on their own - either through finding alternative revenues or borrowing through the crisis - runs the risk that they may simply not be able to survive the crisis. The long-term risk for a big business that does not consider customer concessions, is the fact that no clients may exist after the lockdown.

In the aftermath of the lockdown, the distinction between businesses will shift from state-sanctioned definitions to the question of what customers regard as essential and critical services. Businesses that depend on the discretionary whims of customer - leisure travel, hospitality and sporting events for example - will have a much slower recovery curve after the lockdown is lifted.

The lifting of the lockdown - regardless of what scientific or political considerations drive it - is not going to unleash economic activity for such businesses.

Rather it will be subject to the universal question of what the general infection curve looks like, and whether - in cases that the curve stabilises - customers are comfortable enough to populate the spaces that are avoidable.

Regrettably, this means that the capacity of such businesses to remain viable after a lockdown and a loss of state support, is diminishing with every passing day until a vaccine is found.

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