South Africans are starting off the year in anticipation of the South African Reserve Bank’s (SARB) upcoming interest rate decision on 25 January 2024, a pivotal event that is expected to set the tone for the country’s economic climate for the rest of the year. For the past two years, discussions about the economy have been repetitive: interest rates, inflation, and the constant debate of recession or no recession. While these are important indicators of the health of the supply chain and the direction it is headed, they are far from being the only measures.

Decoding the Interest Rate and Inflation Conundrum

There’s been a lot of speculation around interest rates and inflation. South African economists are predicting that interest rates will hold steady at the monetary policy committee (MPC) January meeting, with a potential reduction on the cards in the second or third quarter.

This narrative is supported by insights from Lesetja Kganyago, Governor of the South African Central Bank, who, during a Bloomberg TV interview at the World Economic Forum in Davos, articulated concerns over escalating inflation rates, compounded by the persistent challenges of load-shedding and its consequent drag on domestic growth.

Since 2021, the SARB’s monetary policy committee has embarked on a trajectory of consistent interest rate hikes, cumulatively amounting to a 475 basis point increase. This culminated in a 14-year high of 8.25% in 2023. Notably, the MPC maintained this rate in November for the third consecutive time.

Looking beyond South Africa’s borders, the global economic landscape presented varied performances in 2023 – from subdued activity in the UK and Europe to a more pessimistic outlook in Asia, particularly with China’s mounting concerns. In contrast, the United States has exhibited a relatively more robust stance, with the market sentiment gravitating towards a ‘soft landing’ rather than a full-blown recession.

Investec Chief Economist Annabel Bishop predicts that the U.S. might make its first interest rate cut in early 2024, possibly as soon as March. Markets, despite lacking a clear direction, anticipate nearly two 25 basis point cuts by May 2024. This expectation aligns with the belief that the U.S. will reduce rates next. South Africa’s Reserve Bank, while independent of the U.S. Federal Open Market Committee, often mirrors U.S. rate movements due to their significant global impact, affecting the rand and inflation.

Modernising the Liquidity Toolbox for Focus and Efficiency

Factors like interest and inflation are important indicators of the health of the supply chain and the direction it is headed, but they are far from being the only measures.

The financial health of a supply chain is best measured by the cash conversion cycle. Measured in days, it shows how much time a company needs to sell its inventory, how much time it takes to collect receivables, and how much time it has to pay its bills. A lower number suggests efficient use of cash in the supply chain as it indicates the company has balanced the time it takes to bring cash into the business against the time it has cash tied up in the production or sale of goods. Unfortunately, the toolbox for how companies can improve the cash conversion cycle (and therefore inject liquidity throughout the supply chain) is somewhat limited. Depending on a business’s credit rating, commercial lending can be expensive and has obvious limitations.

Other areas of focus like demand generation, inventory optimisation and expense reduction are effective, but the runway is long. Companies require a more efficient method to mitigate the economic effects of the three I’s: indefiniteness, inflation, and interest rates throughout their supply chains.

They also need to focus on strategies that impact what they can actually control.

A large multi-national manufacturer cannot control the credit ratings of their suppliers. But they can ensure that those suppliers have access to affordable, efficient capital. Likewise, suppliers have little control over a buyer’s decision or need to extend payment terms. They can, however, choose to participate in early payment programs that accelerate their cash flow and reduce their reliance on expensive and uncertain lending options.

Supply Chain Finance in Action

Early payment options like supply chain finance are a sustainable, effective way to infuse liquidity across the supply chain. It’s also equitable in that it can be offered to suppliers of all sizes. By fortifying cash flow up and down the supply chain, companies can create supply chains that are resilient enough to withstand economic volatility.

Here are a few examples of how some of Africa’s best companies have partnered with Addendum Supply Chain Finance to increase supply chain resilience:

• Omnia used supply chain finance to reduce their suppliers’ high cost of funding and to unlock credit limits that fostered future growth for both Omnia and suppliers. They engaged with suppliers on an individual basis to negotiate rates that resulted in mutually beneficial outcomes for Omnia and its suppliers – setting a new standard for supplier relationships.

• Pick ’n Pay leveraged two types of financing solutions simultaneously in their innovative Fast Pay Supply Chain Finance programme. The programme provided Pick n Pay suppliers with access to capital within 24 hours to enhance their financial sustainability, while freeing up working Capital for Pick n Pay by removing inefficiencies through automation.

• Barloworld Equipment successfully rolled out a Supply Chain Finance program in a record-breaking 8 days. Traditionally the average implementation time of typical Supply Chain Finance programs, from strategy development to implementation and Go-Live, is between 45 and 90 days. Expediting the SCF programme carried significant financial benefit for Barloworld Equipment and its suppliers.

One thing all these companies have in common is their willingness to explore liquidity options outside of the conventional toolbox. Waiting for suppliers to shore up capital on their own was not the answer and did not support the partnership they had with their suppliers.

By focusing on what they could control – in this case, the way in which liquidity was infused across the supply chain – these companies were able to thrive and enable their suppliers to do the same regardless of the economic and supply challenges they faced.

Sources:

www.citizen.co.za/business/personal-finance/economists-expect-repo-rate-to-stay-unchanged/(https://www.citizen.co.za/business/personal-finance/economists-expect-repo-rate-to-stay-unchanged/)

 https://www.businesslive.co.za/bd/economy/2024-01-08-economic-outlook-for-2024-inflation-economic-growth-and-policy-uncertainty/(https://www.businesslive.co.za/bd/economy/2024-01-08-economic-outlook-for-2024-inflation-economic-growth-and-policy-uncertainty/)

dailyinvestor.com/finance/42021/inflation-is-the-enemy-not-high-interest-rates-kganyago/(http://dailyinvestor.com/finance/42021/inflation-is-the-enemy-not-high-interest-rates-kganyago/)

www.bloomberg.com/news/articles/2024-01-16/south-africa-s-kganyago-doesn-t-see-rate-cuts-amid-sticky-prices(http://www.bloomberg.com/news/articles/2024-01-16/south-africa-s-kganyago-doesn-t-see-rate-cuts-amid-sticky-prices)

Text adapted from article originally published by Prime Revenue