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Impact of interest rate hikes on SMEs, Agriculture and Commercial Property

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A more significant 50 basis point hike, leads us to expect that we may see some renewed slowdown in sales activity in the commercial property sector in the 2nd half of 2022, says John Loos, Property Sector Strategist at FNB Commercial Property Finance. A more significant 50 basis point hike, leads us to expect that we may see some renewed slowdown in sales activity in the commercial property sector in the 2nd half of 2022, says John Loos, Property Sector Strategist at FNB Commercial Property Finance.

The South African Reserve Bank’s decision to increase the repo rate by 50 basis points (bps) to 4.75% means that small businesses will likely have to absorb costs in the short term, as their profit margins are already under pressure due to rising fuel prices and power cuts.

According to John Loos, Property Sector Strategist at FNB Commercial Property Finance, a more significant 50 basis point hike, after 3 x 25 basis points’ worth of rate hikes at prior meetings, leads us to expect that we may see some renewed slowdown in sales activity in the commercial property sector in the 2nd half of 2022, while recent declines in vacancy rates may stall on the back of a stalling in demand growth for new commercial space.

He says we also expect this ongoing rate hiking to keep average commercial property capital value growth at low single digits, translating into negative growth in real (inflation-adjusted) terms.

“We expect the pace of new residential development activity to slow in the 2nd half of 2022 in lagged response to interest rate hiking already implemented, and with further hiking anticipated.

Finally, we believe that the residential rental market may continue some moderate strengthening, this component of the residential market typically benefiting from moderate interest rate hiking as a portion of aspirant home buyers choose to delay their purchase and take up rental space instead,” said Loos.

Rate hike bites into farming margins as policy normalization gains momentum

Paul Makube, Agricultural Economist at FNB Agri-Business says the decision to hike the rate, immediately raises the cost of debt and farmers therefore face increased debt servicing costs which will erode profit margins.

The sector has been facing huge input cost pressures due to the war-induced escalation in fertilizer, herbicides, pesticides, and fuel prices. Total agriculture debt stood at R191 billion in 2020 which has increased with an annual compound growth rate of 10.4% in the past five years.

Harvesting of summer grains and oilseed crops has begun and will garner pace in the near term and the rising fuel costs will increase the cost of operations.

Further, with fertilizer prices having increased sharply in 2022 farmers will be forced to increase their debt requirements in preparation for the new planting season and subsequently higher debt costs due to rising interest rates.

Nonetheless, the agriculture outlook is still positive for the year ahead.

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