CATHERINE WIJNBERG: Cape Town’s ratings upgrade good news for SME sector

An increasingly common question being asked is what are the underlying, root causes of unemployment in the country?

The answer lies in our lack of economic growth, for without growth it is very hard for small businesses, which are the engine room of job creation, to thrive. This weak economic growth has been reflected in declining business confidence, resulting in low levels of capital investment especially in key long-term sectors such as mining. 

Against this slightly gloomy backdrop it is heartening to hear how the Western Cape, and the City of Cape Town in particular, is bucking the trend and emerging as a shining light for SME investments.

In 2023, the province attracted the most start-up funding, according to a recently released report. The Southern African Venture Capital & Private Equity Association’s most recent report on the venture capital ecosystem in SA found that the Western Cape accounted for more than half of overall venture capital funding in SA last year.

In any economy the rate of investment increases as confidence goes up. In June, ratings agency Moody’s Investors Service upgraded Cape Town’s credit rating from stable to positive. The upgrade, which is based on the progress made in improving revenue collections and controlling expenditure, is a significant confidence milestone that signals improved economic stability and creditworthiness, opening new avenues for investment. Moody’s noted improved management policies and practices and said the city’s financial performance could strengthen even further in the next 12 to 18 months.

Creditworthiness is essential for attracting investment. An investment grade makes a significant difference to a country’s relative ability to attract foreign investment. Historically, an upgrade encourages continued implementation of transparent governance, the fostering of a conducive business environment and maintaining fiscal responsibility. Portugal and Ireland are both good examples of countries where strategic economic reform and fiscal discipline led to credit rating upgrades and subsequent investment booms.

The World Bank estimates that “every dollar invested in the creditworthiness of a developing country is likely to mobilise more than $100 in private sector financing”.

Cape Town’s credit upgrade is a significant and encouraging development for the small business sector. We are especially excited by the city’s announcement of an ambitious R39.5bn investment in infrastructure over the next three years in water projects, bulk sewer upgrades, electrical grid upgrades and maintenance, road maintenance and upgrades of informal settlements, among other projects.

This will be the largest-ever three-year infrastructure investment by a metropolitan municipality in SA, and is particularly exciting because of the clear correlation globally between a developed and efficient infrastructural ecosystem and economic growth. If we want our businesses to thrive, we need to build them the right playing field.   

Stimulus

This capital investment will act as a stimulus in the economy and provide a significant boost for small business. The Moody’s upgrade stands out as a beacon of hope in a country that has long been constrained by the poor state of many of its municipalities. In the 2022/23 auditor-general’s annual report on the condition of local government, only 38 out of 257 municipalities received clean audits.

Taking the lead from growing economies such as Brazil and India, Cape Town has been making a concerted effort to improve its business environment to make it easier for businesses, including small and informal businesses, to grow and prosper. It has introduced the Cape Town Ease-of-Doing-Business Index, which combines indicators from the discontinued World Bank Doing Business survey, as well as other leading “doing business” indicators, to assess the extent to which the city either constrains or enables businesses.

In addition, there are various sector-focused incentive schemes and tax rebates to encourage economic activity. The costs and complexities of starting and growing a business in SA are still not where they need to be, but we are moving in the right direction.

Importantly, these steps being taken to create a more enabling environment have proven effective — Cape Town has the lowest broad unemployment rate of all SA metros. In the fourth quarter of 2023 the city increased employment by 7.4% compared to the fourth quarter of 2022. Indications are that the city is on track to bring the unemployment rate below 20%, which is significantly lower than the 32.9% unemployment rate recorded nationally in the first quarter of 2024.

Cape Town is not the first African city to improve its income and financial position through better management and collection of revenue, rather than introducing new taxes. Ugandan capital Kampala has been working on improving its creditworthiness for more than a decade. A strategic plan to restore good governance and service delivery, including improving the city’s creditworthiness, meant that in just one year the city managed to increase its revenue by 86% through better revenue collection and other efficiency improvements. In a three-year period, the city more than doubled its revenue and debt capacity, and improved its investment capacity, resulting in an A (investment-grade) rating by Global Credit Ratings. Uganda boasts a consistently low unemployment rate. In 2023, it recorded an unemployment rate of 2.9% and a youth unemployment rate of 4.47%.

Emerging from a national election with a positive market reaction boosts confidence in SA’s business environment, providing investors with the assurance that the country is committed to creating jobs and nurturing a sustainable tax base. This environment is crucial for the continued recovery and growth in the economy, and success of SMEs, which bodes well for employment, shared wealth and improved wellbeing.   

The effects of an improved credit rating, infrastructural development and the creation of an enabling environment for small businesses on our economic growth are evident for all to see. A concerted national strategy focused on delivering these pillars is the logical next step. 

• Wijnberg is founder and CEO of business growth agency Fetola.