BUSINESS LAW & TAX Rate hikes can be even bigger challenge for employers

• Fluctuations can quickly lead to pressures from all around that put the enterprise’ s survival at risk

Alex Taylor, Prencess Mohlahlo & Matlhatsi Ntlhoro ENSafrica

henever the governor of the Reserve Bank, Lesetja Kganyago, announces a hike in the repo rate, the first thing that comes to mind when we see the headlines, is the impact of the hike on homeowners or consumers with financed vehicles or other lines of primelinked credit

The effect of the increase in the repo rate on employers is seldom spoken of, or even written about

Yet it is important to understand the relationship between the repo rate and the prime rate, how employers are exposed to the impact of an increase in the repo rate and how that inevitably affects the liquidity position of the employer, which may, in severe cases, result in retrenchments

WThe repo rate is the rate at which the Bank lends money to commercial banks in SA The rate is adjusted from time to time by the Bank in accordance with its monetary policy to regulate inflation to allow for a stable and growing economy

The prime rate is the rate at which commercial banks lend to their most favoured customers Since November 2021, there has been a cumulative 425 basis points increase (4 25%) from a low of 3 5% for the repo rate and 7% for the prime lending rate This has increased pressure on consumers with assetbacked credit such as mortgage bonds and vehicle finance On March 30, Kganyago surprised the market by announcing that the repo rate would be hiked by 50 basis points, thus increasing the repo rate to 7 75% and the prime rate to 11 25% the highest level since 2009

The fluctuation of the prime rate affects not only the growth of a business but also determines whether a business can keep meeting its financial obligations and ultimately keep its doors open When the repo rate increases, this increases the prime rate and results in lenders (such as banks) increasing credit rates, making it more expensive for businesses to secure funding and/or to repay the existing debt that the business requires to sustain its operations An increase in the prime rate can have various effects on businesses These include:

● A reduction in cash flow: business owners will have to set aside more cash towards repaying loan amounts;

● Consumers having less discretionary cash available to use on goods and services (especially nonessential goods and services) which may affect revenue;

● Difficulty in obtaining business loans: long-term and short-term debt becomes more expensive;

● Difficulty in repaying prime-linked intercompany loans; and

● Making it more difficult for employers to create or retain jobs

This may force some employers to consider restructuring their businesses to optimise their resources When all else fails, employers may have to terminate employees employment on the basis of their operational requirements

Operational requirements are based on the economic, technological, structural or similar needs of an employer Generally, economic reasons are those that relate to the financial management of the enterprise; technological reasons refer to the introduction of new technology that affects work relationships; and, structural reasons relate to the redundancy of posts consequent to a restructuring of the employer’ s enterprise A restructuring based on an employer’ s difficulty in securing funding for its business due to the high prime rate, or a reduction in its revenue or profit as a result of