Challenges facing African SMEs

Posted on March 26, 2017 12:00 am

More than half of Africa economic activity is driven by SMEs from all sectors ranging from agriculture to manufacturing. However, most of African businesses are facing increasingly difficult conditions, as fluctuations across both African markets and the local economies create a persistent challenge that companies will need to address.For senior executives, understanding these developments and positioning their business to make the most of new opportunities will be essential for realising strong ongoing growth. As the economic situation continues to fluctuate throughout 2017, senior managers are going to see even greater demand on their core leadership skills to navigate these changes. This has been reflected in the most recent survey which revealed that although business leaders are confident about the future, 49 per cent feel the biggest barrier to future growth will be their ability to develop new innovation. A further 30 per cent are worried about finding the right staff, while 21 per cent cited difficulty in securing funding and access to capital.Uncertain economic conditions and the ability to access capital present SMEs with a challenging business environment. Africa’s senior managers must rethink their current strategies to find new ways to grow and thrive in a competitive and unsteady market.In today’s challenging environment, the day to day management of running an enterprise can often leave business leaders feeling isolated, undermining their confidence. Business owners in Africa are faced with daily make-or-break decisions that could have significant implications on their business and many leaders without a support network feel they are making these big calls in a vacuum. To get a better understanding of the major trends affecting SMEs, your blogger sought views and insight into the trends that will affect business performance in the next 10 months from a senior manager in multinational operating in East and Central Africa who said that cheap energy, money and low wage rates mean 2017 is likely to be great year to get ready for growth.He does believe that the business operating environment will improve gradually through 2017, thanks to favourable trends in labour costs and energy prices, lower interest rates and the weaker African currencies. Indeed, we have already seen hints of these trends in recent Africa surveys of small business.

Eventually, he expect these factors will feed into stronger growth in most sectors outside of mining and related services, so SMEs should already be preparing themselves for a cracking 2018. Overall, 2017 will continue to be characterised by the transition to a post commodity-boom economy. There will be progress and some sectors will do extremely well in certain African countries. Businesses linked into the construction market in countries like Tanzania seem set for a good year, for example.However the fallout from the end of the mining investment boom is taking some African countries economy along a lumpy path and 2017 could continue to see some bumps. Conditions are likely to be stronger in 2018. This means this is a good year to get prepared for better times ahead by taking advantage of relatively low costs for staff, energy and money. Another business executive working for a UK bank with operations in several African countries told me she remains confident the African economy will make the transition from the mining boom back to what we call business as usual of relying on agriculture and local manufacturing. She alluded that steady expansion of the economy lead by business spending, housing investment, consumer spending and employment growth across a wide range of sectors would still be the most likely outcome.The political scene will remain difficult, with most African governments reluctant to spend due to their ambitions for fiscal consolidation and also some of them are facing re-election headache like Kenya’s President. There is also pressure for governments to find additional revenue as the case is in South Africa. However there is unlikely to be much progress on taxation reform this year in Africa. This is because any big bang on the tax policies front that might make a material difference for businesses will likely have to wait. Some of the biggest countries will be disrupted by elections. In Africa, there are two main components to labour costs namely the wage rate and the administrative elements of hiring and firing. Your blogger think that overall labour costs will remain steady or only grow a little bit, driven by softness in wages. African countries ballooning administrative costs around labour will not really change and Kenya is a prime example. The government has stayed away from implementing debt reduction measures thus far and I can see very little relief from taxes or regulations in the short-term. The labour market remains soft despite some evidence of rising hiring intentions. Ongoing job losses in some sectors and strong labour force growth are pushing the unemployment rate higher in East Africa’s most developed economy. This is hurting consumer and ultimately business confidence.

But the unemployment rate is drifting up and the wages of African workers, which were the most expensive years ago, are slowly adjusting. Some of that change is happening via the weaker Nigerian Naira and South African Rand but it is also occurring through wage restraint. Kenyan wages have failed to keep up with inflation in recent years due to weakness in labour demand. With inflation likely to edge lower this year, and the labour market to remain soft, wage growth will probably remain weak for another year.The really weak spot for employment is for young people. The unemployment rate for under 30s is now as high or higher than at any other time in the continent’s history. This could be used to strategic advantage by business. Targeting Africa’s young and training them for medium-term growth is worth thinking about over the year ahead. Africa’s older workers too are a potential source of talent and provide business with a wealth of knowledge. Population ageing can advantage those African businesses willing to invest in maturity and experience and the data plainly illustrates that older workers particularly older women, are keen to stay in the workforce for longer. In the presence of a soft labour market, a lower headline inflation rate is more likely to filter through to wages and then core inflation as well.All these factors should support growth in the African economy over the course of 2017 ahead even if that growth is still a bit below the past decade norms. The key is that the non-mining economy will continue to improve as headwinds abate and the factors discussed above exert a positive influence on activity. For African SMEs it is going to be important to get in ahead of the crowd and take advantage of these positive conditions.The exception is the mining sector, which is suffering from a wind down in investment activity and weaker international prices especially copper in Zambia like the case is with oil in Angola and Nigeria. The mining sector will continue to shrink over the year ahead. I do however expect commodity prices to stabilise over the first half of 2017, helping the economics of mining down the track.At the other end of the spectrum, the residential property market and to a lesser extent the non-residential construction sector should continue to do well.Construction approvals suggest that building activity in most of the major cities will remain strong in 2017. This should increase employment in these sectors and have positive spin-offs for related manufacturing activities.The great bulk of the African economy is still just muddling through with business confidence and may take until mid this year through the year for an improvement in momentum to show up in business spending and employment.

Contador Harrison