As startling as the StatsSA figures might be, they don’t quite reflect the current state of affairs because liquidations, being lagging indicators, are the conclusion of a lengthy legal process comprising asset fire sales, creditor repayment, the distribution of remaining assets to shareholders and deregistration.

The greatest worry is how businesses will cope in the first quarter of 2023 and beyond. 

Senior economist at Absa Investment and Corporate Banking, Peter Worthington, said seasonally adjusted liquidations had risen sharply by nearly a third over the past two months, to their highest level since March 2021.

Of the 159 liquidations in December, 32 were in the “trade, catering and accommodation” sectors, which were hard hit by repeated restraint on trade during the pandemic, while 55 were in “finance, insurance, real estate and business services” — a broad category in which the commercial property sector is yet to recover post-Covid.

“We attribute this increase to load shedding, given all the media reports about how intensified load shedding is weighing particularly heavily on small businesses. And, of course, company liquidations are very much a lagging indicator, so this release should be monitored carefully going forward for evidence of how deeply the intensified load shedding has hit the productive capacity of the economy.”

The concern is around how especially small operators were coping with the impact of the blackouts. 

“They’re not big enough to run a generator for [the duration of the blackout schedule] and not big enough to install their own solar…”

The ramped-up power supply crisis is weighing heavily on companies, particularly SMMEs, many of which cannot afford to run generators, UPS and other alternative power supplies.

With Stage 6 rolling blackouts throughout most of January, small businesses — from dog parlours and print shops to takeaway outlets, ice cream parlours and farms — have had to rely heavily on generators to continue operations.

Many businesses, farmers especially, have warned that they will be forced to close shop if the current schedule is maintained. 

Last week, a North West farmer said he planned to sue Eskom after 40,000 of his broiler chickens died from a lack of ventilation in the coop during rolling blackouts.

On Monday, a Mooi River, KwaZulu-Natal dairy farmer tweeted about being forced to dump more than 12,000 litres of sour milk.

Thank you Eskom…12000 litres of milk sour due to your poor service… pic.twitter.com/kLlRHQhY4W

— Alan Stratford (@AlanStratford1) January 22, 2023

With harvest season upon them, wine farmers are similarly under pressure. 

Last week, at the Nedbank Vinpro Information Day, attended for the first time since 2019 in person at the Cape Town International Convention Centre, wine industry representatives spoke frankly about preparations for another tough year, as climate change, a significantly smaller harvest, increased labour costs and the ruinous blackouts — which are disrupting much-needed irrigation for vineyards — are heaping pressure on farmers. 

Nedbank economist Isaac Matshego was not optimistic about the country’s economy after Covid, saying: “We’re currently in the worst downturn in our history — the longest and deepest [downturn], with the weakest start to the decade in recent history.”

He warned that the self-inflicted damage of rolling blackouts to SA’s economy means the country will miss out on international investment expected from a 2024 global economic upturn.

“Investment remains weak on the back of low business confidence.

“On a positive note, however, compared to our emerging market peers, South Africa’s inflation rate did not shoot up that quickly and the Reserve Bank remains committed to managing inflation.”

Running out of runway

Dr Ian Levenstein, head of Werksmans insolvency, business rescue and restructuring practice, said no matter the sector, the cost of doing business in South Africa was becoming expensive. 

“The bigger companies probably can get bigger support loans from the banks, whereas the smaller guys are going to struggle, and particularly with some legacy debt issues, with creditors maybe not being paid on time.”

Businesses need to reach out to their creditors to try to negotiate better terms, he said.

“Everyone knows what these companies are facing. Work with your suppliers and bankers, and get maybe a moratorium for a period of time. Try to get better trading terms or better deals on credit.”

Sandra Beswick of business rescue specialists, Fluence Capital, told Business Maverick that a number of contributing factors are at play — the main consideration being that the Covid “holiday season” was over and that banks were calling in their loans. 

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“They give people a lot of leeway. I also think that the inflationary pressures, load shedding, higher prices for energy and interest rates are all having an effect on the companies trying to survive in this environment.”

Beswick, a former banker, said banks prefer to liquidate sooner rather than later, maintaining that their first loss is their best loss. 

“They usually have all the security that other creditors might not have, so they are in a stronger position and would rather opt for liquidation than try to resuscitate these companies.”

The problem is that business owners and directors are often in denial about the state of their company, and don’t take action quickly enough to try to save a business.

“By the time they do something, it’s probably too late and there is no commercial viability anymore. They have used up all their funds and their resources,” Beswick said.

More failures pending

Going into the first quarter of this year, Levenstein expected to see more corporate failures. 

“And the question simply is, do these directors and managers of these companies have access to legal advice in relation to what the options are? [These might be to] continue the way you are, kick the can down the road and hope that circumstances change, or you can get professional assistance to put a plan in place. 

“It doesn’t have to be a formal rescue process; it can be done by informal restructuring.”

Economists will certainly be watching the degradation numbers closely in the coming months, to get a grasp of the narrative that small businesses are shutting their doors. BM/DM