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South African businesses are feeling the emerging market pinch, with optimism falling to record lows in the third quarter of this year, according to the latest Grant Thornton International Business Report (IBR) quarterly tracker survey.

South Africa’s optimism for business prospects for the coming 12 months fell to its lowest level ever, at 18% for the third quarter of 2013. This is a figure which has been steadily declining since the first quarter of 2011 (71%).

“The low sentiment amongst South African business owners could be ascribed to the flight of foreign funds following initial indications from the US Federal Reserve earlier this year that it would start tapering its economic stimulus programme,” says Deepak Nagar, national chairman of Grant Thornton SA.

“This announcement was contingent on its economy showing sufficient recovery, which has not yet been fully realised, but the signal prompted fund managers to withdraw capital from emerging markets that had been offering higher returns in the recent past.”

Grant Thornton’s IBR provides tracker insights for the third quarter of 2013 to September specifically presenting perceptions into the views and expectations of over 12 500 privately held businesses surveyed in total per year across 45 economies.

It also highlights regional and national perceptions of privately held businesses regarding crime, service delivery and political climate for 600 South African business owners annually.

This data reveals that South African business leaders are not alone in feeling more pessimistic, with emerging markets also appearing downtrodden. However, the UK and US optimism data reveals a “U-turn” in sentiment with both economies seemingly driving growth prospects in the third quarter.

When data is compared specifically for the second and third quarter of 2013, the change is sentiment in just three months is startling. The IBR reveals UK business optimism has shot up from 34% in Q2 this year to 76% in Q3.

That is the highest figure ever recorded for the UK in 22 years of IBR research, and makes its business community the third most optimistic in the 45-economy survey. Business optimism in the US remains high too, at 52% in Q3 although marginally down from 55% in Q2.

For the third quarter of 2013, the struggling Eurozone recorded a move back into positive territory in terms of the IBR optimism index – at 8% (Q2-2013: -8%).

By comparison, South Africa’s emerging economy partners are markedly less confident. Brazilian optimism fell from 43% (Q2-2013) to 31% in the quarter three, a record low, while across the Latin America region as a whole optimism fell from 48% to 38% – its lowest since 2009.

Elsewhere, Indian optimism (57%) fell to its lowest since 2003; Russia slid from 28% to 19%; Turkey (6%) dropped to its lowest since the financial crisis; and South Africa hit an all-time low of 18%.

Local IBR indicators reveal that the lack of a skilled workforce, poor government service delivery continue to plague South African business perceptions.

The lack of a skilled workforce has been flagged once again as a significant constraint to operating a business in South Africa, with 39% of business owners stating this issue as a constraint to business growth and expansion.

“It is painfully ironic that we have chronic levels of unemployment, yet organisations are constrained from growing their business, and the economy, because we lack the right skills,” says Nagar. “It is even more painful that these discrepancies could most probably be dealt with through prudent labour market policies and a more inclusive dialogue between labour, unions and employers.”

Issues of over regulation and red tape as a constraint to business expansion in South Africa is on a par with global sentiment at 38%.

“This picture could get worse in the coming months, given the Licensing of Businesses Bill that will require all businesses to register with their local municipal authority, further fuelling the overregulation debate,” adds Nagar.

Of far greater concern for local business leaders is the impact that failing government services has on South African business with 59% of privately held business owners lamenting this issue.

Concern over basic utility services (water and electricity supply) has increased to 79% from 42% a year ago. Road infrastructure concerns (such as potholes and traffic light issues) and the negative impact this has on SA business executives has climbed to 64% from just 17% last year. Fifty eight percent (17% in 2012) of businesses flag rates and taxes as a constraint to doing business.

“Clearly, the state of service delivery and infrastructure is not restricted to disaffected communities that have risen up in protest over the past number of years,” says Nagar.

Nagar also laments South Africa’s crime and security situation.

“It is extremely worrying that crime continues to impact on business in South Africa, with 62% of businesses indicating that they have been affected by the threat to personal security as a result of contact crime events.” Contact crime is defined in the research as housebreaking, violent crime, road rage or hijacking.

Contrary to popular perceptions, Gauteng is not the worst-affected region, as KwaZulu-Natal topped the tables as the region in which businesses are most impacted by crime, at 67%, followed by the Western Cape (62%) then Eastern Cape and Gauteng, both at 60%.

The greatest impact has been the increased cost of security, which 74% of South African businesses flag as the biggest financial burden they face.

The impact of political uncertainty and the effect this has on the future business decisions for SA businessmen has risen to 38% from 30% a year ago, which has led to a startling two thirds (66%) of business leaders deferring investment decisions compared to just 27% in the third quarter of 2012. This has had a direct effect of pushing 47% of businesses to consider offshore investments from only 23% a year ago.

The flight of privately held business owners from South Africa also appears to have picked up pace as a result of political instability in the country, and although the figure of 14% of respondents considering emigration is fairly low, this has climbed 10 percentage points from last year (Q3 2012: 4%).

When business owners were asked in the IBR survey whether they were considering selling their business the responses have nearly tripled to 31% from 12% (Q3-2012) over the same period.

A new question – that of the impact of corruption – was introduced for the first time in this quarter’s Grant Thornton International Business Report. Less than 12% of respondents indicated that this had a strong negative effect on their business, with 31% saying the effect was mild. The remainder of respondents said the effect was either nil or not evident in their business dealings.

“While we would obviously wish that the impact of corruption on business could be as close to negligible as possible, the reality is that this scourge exists,” says Nagar.

“We do not yet have historical data from our respondents given that this question was asked for the first time this quarter, but we believe this will become an increasingly important additional measure of business conditions in the country.”