• Negative Risk Trends in South Africa

Negative Risk Trends in South Africa

04 March 2016

South Africa is facing one of its toughest periods ever. The fluctuation in the exchange rate caused by the unstable global markets has caused worry for many South Africans. The consequence of this has seen many people tightening up on their spending, and business owners restructuring in order to stay afloat. A recent survey conducted by audit, advisory and tax firm, BDO, highlights the growing frustration amongst the corporate public, however, the study also points to a growing sense of hope for the future of South Africa.

The current operating climate in which the country finds itself means that we have to contend with a range of mutable issues. This presents an opportune time to analyse the hundreds of indicators, to obtain the best understanding of potential risks facing the country’s economic, political and business environments. Graham Croock, Director of Risk Advisory Services at BDO, says there are certain risks outside of the tolerable appetite for risk, which could cause havoc in the South African markets, make it difficult to conduct business in the country.

“We have developed a consolidated risk matrix that sets out what the top risks in South Africa are and what is likely to happen if the risk persists. It helps guide management’s action in controlling the risks and guides management’s action in controlling the risk,” says Croock.

“We have identified almost 28 risks that impact business confidence, as acknowledged by South African executives within the financial services industry, specifically those linked to infrastructure development and property based companies.”

South Africa is currently in a precarious position with a considerably higher inherent and residual risk rating. This is characterised by a host of challenging operating variables including diminishing confidence levels by both local and external counterparts, volatile interest rates, increased levels of political uncertainty and severe drought conditions. These variables represent a fraction of the collective risks identified by BDO.

At the very top of the list is South Africa’s potential downgrade by the ratings agencies, followed by a downward revision for state-owned enterprises, banks and municipalities that borrow on international markets. The inherent consequence of such a situation would be almost catastrophic for the country as the cost of borrowing could eventually become very expensive, and the rand may reach unimaginable lows.

Croock notes that in order to combat this, executives need to assign appropriate responsibilities, tested presumptions and practicalities while ensuring that all business units have prepared their internal structures and processes to respond quickly to changes as and when they occur. “Additionally, regular and consistent monitoring on an on-going basis by the leadership team is imperative, coupled with appropriate agility with regard to change,” he states.

Diminishing confidence levels from both local and external counterparts as a negative risk also presents an unbalanced scale of operation for local businesses. In this regard, effective relationship management applied consistently by executives and development and implementation of well-structured awareness programmes will go a long way in building capacity for business performance sustainability and also reducing the potential of undue influence. The same control principle can also be applied to volatile interest rates currently resulting in restrictive capital constraints and the increased levels of political uncertainty in South Africa and across the rest of Africa.

“The markets work in cycles and eventually the country will turn a corner. As difficult as it is to imagine, commodity prices will change significantly in the long run and the political situation will settle down, we just have to live through it whilst ensuring few casualties. To do this, executives need to be proactive, address risk face on and not deny the severity of the current situation and its potential impacts on reduced growth and ultimately mass exodus of capital and expertise. ” stresses Croock.