At its meeting in March 2014, the South African Reserve Bank left the benchmark interest rate unchanged at 5.5%. However, the reserve bank implied that an interest rate hike is on the cards for South Africa, and according Gary Palmer, CEO of Paragon Lending Solutions, this hike may take place when the MPC meets later this week.
“Whether or not an interest rate hike takes place this week all indications suggest that there will be a rate hike in 2014. As such businesses and consumers should prepare for rate hikes well in advance to ensure that they don’t encounter any financial setbacks and budgetary challenges.”
He says that an increase in interest rates can have a variety of consequences for business and property owners which may affect their operations. “If businesses do not plan for interest rate increases it can radically alter their financial situation and cause unforeseeable issues in their business. As an example an increase of 1.5% to the cost of borrowing can result in a business defaulting on its payments.”
He says that business owners are directly affected by interest rate hikes as the cost of borrowing from banks will increase and will ultimately cause a longer term reduction in the purchasing power of consumers. He adds that business owners are also indirectly affected as consumers tend to spend less because they too are affected by rate hikes through increased interest rate payments on personal overdrafts and mortgages.
“Surprisingly, there are many defaulting borrowers who often don’t communicate with the banks and go silent when in a crisis. The best advice I can give borrowers, who run into difficultly, is to communicate their issues well in advice to their lenders and ask for assistance in drawing up a cash flow forecast in anticipation of potential rate changes. This way lenders will be able to assist business and property owners in finding solutions well ahead of any foreseeable problems.”
He adds that property investors should conduct a sensitivity analysis on all the variables in their forecasted cash flow statement, given the current economic environment of increased interest rates and its effects on tenant defaults and cost of borrowing as well as the increase in municipal changes and its effect on the costs of holding property.