Rising inflation, adverse financial conditions such as persistent high-interest rates and the Russia-Ukraine conflict as well as the heightened geo-political tensions and load shedding have affected South Africa’s economic growth. Fortunately, our economy escaped recession as Stats SA recorded a 0.4% increase in economic activity for the first quarter, despite all these global and domestic macroeconomic headwinds.
But, as a matter of fact, our economic outlook remains bleak as businesses continue to feel the ripple effects of load shedding. A Small Enterprise Finance Agency and Ministry of Small Business Development survey found that 71% of companies have been negatively impacted by load shedding this year.
In the Monetary Policy Committee statement (MPC) in May, the Reserve Bank Governor, Lesetja Kganyago said energy and logistical constraints remained binding on our growth outlook, limiting economic activity and increasing costs. The MPC estimated that load-shedding alone will deduct two percentage points from growth this year. Kganyago cautioned that economic growth has been volatile for some time and prospects for growth remain uncertain. However, the bank believes that improving logistics and a prolonged reduction in load-shedding, or increased energy supply from alternative sources, would significantly stimulate growth.
Meanwhile, data released by Stats SA in June, shows that production activity increased 3.4% year on year in April. This means businesses are not fully dependent on Eskom anymore and have invested in alternative energy sources. But the survey by the Rand Merchant Bank (RMB) and compiled by the Bureau for Economic Research showed the business confidence index dropped 27 points in the second quarter from 36 points in the previous quarter.
High inflation impacts all businesses in various industries. Other factors such as the Russia-Ukraine conflict, the sharp rise in oil and gas prices in Europe, and natural catastrophes are contributing to supply chain disruptions, high commodity price and manufacturing costs as well as energy constrained in South Africa.
Overall, load shedding has a detrimental effect on both imports and exports in South Africa resulting in delays in the delivery of goods and increased costs for businesses. It decreases the economy’s productivity and international competitiveness by negatively impacting the entire supply chain, causing delays in the delivery of goods as well as increasing the costs of doing business. The increased cost of doing business has led to many companies laying off employees, while others have been pushed to the brink of closure.
Business interruption and supply chain disruption rank as the second top risk in this year’s Allianz Risk Barometer due to the growing perils globally. Supply chain disruptions are being driven by port congestion and skyrocketing freight costs. The S&P Global South Africa Purchasing Managers’ Index which tracks business activity across the private sector fell to 47.9 in May, the lowest level since July 2021, from 49.6 in April, as businesses suffered a decline in new export orders for the first time in four months.
Mitigating the risks
This new economic environment makes it more critical for businesses to review their insured values and their policy wording to determine whether their business interruption insurance policies remain adequate to respond to all these risks.
Business interruption insurance can help protect the business financially if it is forced to close due to an unexpected event insured by this section of the policy. This will allow businesses to replace lost business income if the insured cannot operate the business on a temporary basis due to a loss covered by the policy, such as a fire or theft, if a theft extension is selected.
As the costs to rebuild and recover after a loss increase, it is essential for the insured to review insurance coverage and ensure that they have adequate coverage amount because the business will have to absorb any financial losses above their coverage limit. For example, the insured needs to know how long it would take to get the business up and running after experiencing perils like fire or floods. The business interruption policy would cover the costs of operating the business while repairs are being made to the building. In this situation, the client needs to continue working with their broker to find the best approach and to make the necessary adjustments. But it remains the responsibility of the client to take all necessary steps to mitigate further loss or damages.
It’s important that the insured discuss their business continuity plan with their brokers. This will allow the client to tailor their business interruptions cover to their needs. For example, if the client has two factories in different manufacturing, in the same or similar industry, the insured might not need a loss of profit cover, but only increased cost of working which is an amount that can cover additional expenses directly related to the loss. One example of such an expense could be transporting staff to the secondary premises and payment of overtime so that machines can run 24 hours a day instead of 12 hours.
Article credit FIA – Financial Intermediaries Association of South Africa