economics

Rightsizing the Goldilocks dilemma

Rightsizing: the ‘Goldilocks dilemma’ for business under COVID-19 pressure

USB News

Rightsizing: the ‘Goldilocks dilemma’ for business under COVID-19 pressure

Rightsizing the Goldilocks dilemma
Credit: Alexis Fotos, Pexel

  • July 30
  • Tags Press release, Importance of rightsizing, Coronavirus

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Downsizing may present a short-term solution to survival for businesses under the pressures of the coronavirus pandemic, but rightsizing – checking the relevance of value propositions, repurposing resources and filling gaps in customer needs – should not be overlooked as a route to longer-term sustainability.

“We all know the fairytale where Goldilocks is faced with three steaming bowls of porridge – they all looked appetising but on closer inspection, one proved to be too hot, one too cold and only one was just right.

For business, these challenging times call for creative solutions to cost and relationship management… – Sonja Cilliers

“For business, these challenging times call for creative solutions to cost and relationship management that are neither too hot or hastily imposed, nor too cool and distanced from the customer, but just the right size,” says University of Stellenbosch Business School (USB) managerial accounting senior lecturer Sonja Cilliers.

“There cannot be a blanket assumption that business will return to normal post-coronavirus, and without strategic thinking and planning, a real danger exists that short-term solutions to alleviate the pressure cooker of the present may negatively impact medium- to long-range decision making,” she warned.

Business survival top of mind globally
Business survival is top of mind worldwide, with daily announcements of leading companies in trouble – multi-national corporations such as car rental giant Hertz, $18-billion in debt, and retail chain JCPenney ($4.2-billion debt) filing for Chapter 11 bankruptcy protection in the USA in May alone. Locally Edcon filed for business rescue in April, with revenue losses of R2-billion, Comair followed in May (R3.4-billion in debt), and Massmart announced earlier this month that up to 1 800 employees in its Game stores could be retrenched.

Challenges facing organisations
The challenges are clear in the second Stats SA survey of the impact of COVID-19 on business, published in mid-May, indicating that 9% of the 2 182 businesses surveyed across various sectors had already closed down permanently by 30 April, almost half had “paused trading” in under Level 5 lockdown in April and 30% said they would not survive a month without any turnover.

Although the follow-up survey  published at the end of June showed that pressure had eased slightly under lockdown level 4, mounting cash flow problems still appeared to threaten survival, with only a third of businesses confident that they had the financial resources to continue operating through the pandemic, said Cilliers.

“If the issues faced are of temporary nature and the company finds itself in a position in which it cannot meet its financial obligations, then a process such as business rescue may be a viable option.

“For those companies that have some leeway in terms of cash management and therefore the luxury of time to plan, it would be sensible to consider two aspects: First, to deal with the immediate threat to continued operations and, second, critical analysis of the sustainability of the business model and the continued relevance of the value proposition to the customer.”

While an application for business rescue or bankruptcy protection doesn’t mean a company will necessarily be liquidated, and corporations such as General Motors and Delta Airlines have regained profitability after bankruptcy reorganisations, she said, “the challenge in the wake of the COVID-19 pandemic is to determine whether the business model followed by a company is still valid”.

…where possible, organisations should aim towards a rightsizing rather than a downsizing orientation. – Sonja Cilliers

She said cost-cutting measures to deal with immediate cash flow problems should be done with a clear view to the direction in which the company is headed, and “where possible, organisations should aim towards a rightsizing rather than a downsizing orientation”.

Call for creative solutions
“Rightsizing requires that resources be repurposed to where the needs gap is manifesting currently. It may very well be that rightsizing the organisation may lead to increased activity in certain aspects of the business, for example products that fulfill basic needs of customers may see an increase in demand in these times.  The challenge then becomes how to repurpose resources, which may range from redeployment of the workforce to the reorganisation of a production plant,” Cilliers said.

She pointed to the example of US supermarket group Whole Foods which has turned some of its physical store locations into “dark stores”, repurposing them into semi-warehouses for online order fulfilment to meet a massive increase in demand for grocery deliveries and curbside collections as customers seek physical distancing.

“The customer needs gap is filled while also providing the store with a greater margin of control over the current bottlenecks and delays suffered by delivery services,” Cilliers said.

She added that relationship management throughout the value chain will be a critical success factor to ensure the survival not only of the company, but the entire value proposition to the end user.

The loss of key supply partners “may prove to be as catastrophic to the business as is the loss of customers”, she said, pointing to the Stats SA survey1 which indicated that 53% of businesses had been unable to obtain the materials and supplies required to continue operations.

The pandemic environment means companies will have to revise forecasts and adjust budgets on a rolling basis… – Sonja Cilliers

The pandemic environment means companies will have to revise forecasts and adjust budgets on a rolling basis, even though assumptions about future revenue that underlie budgeting are particularly challenging with customer spending patterns impacted by decreased income, changing needs and physical impediments to purchasing.

“Revenue assumptions drive production or service costs and in many cases, these costs are fixed over the short term. Even where costs are seemingly locked in, managers will have to think about renegotiating terms, repurposing and rescaling activities.  If businesses can access their relationship capital without resorting to a formalised business rescue exercise, they may be able to garner a larger amount of control and flexibility as to the way forward,” Cilliers concluded.

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Africa covid-19 economy

Is COVID-19 Africa’s economic curse or cure?

USB News

Is COVID-19 Africa’s economic curse or cure?

Africa covid-19 economy
Source: Pexels)

  • MAY 28
  • Tags COVID-19, pandemic, coronavirus, Africa, economy, African Frontiers

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African business experts converse about COVID-19 and its impact on Africa’s economy.

Will COVID-19 propel Africa to new economic heights? Or will it cause more people to die from starvation and leave Africa’s economy in ruins? These were some of the questions that were addressed by four African business experts who participated in an MBA panel discussion for a module called Perspectives on African Frontiers.

Dr Nthabiseng Moleko, who hosted the event for USB, quantified that due to COVID-19, 30 million people have lost their jobs in Africa, and a third of the continent’s countries are now at risk of debt distress. Africa is also estimated to lose half of its GDP growth, which is expected to plummet from 3.2% to 1.8%.

“The impact of Corona will be felt for decades to come,” said Dr Louis van Pletsen, the Founder and Director of InAfrica Holdings. He added that 580 million informal workers in Africa had seen their average income decrease by 80% in the last month. Van Pletsen emphasised that the impact would be five times that of the 2008 financial crisis.

“We will have more people die of starvation than of COVID-19,” said Andrew McLachlan, the Managing Director for the Hilton Hotel Group in Sub-Saharan Africa. McLachlan stated that jobs should be created in this time rather than taken away.

“We need to understand the catastrophic nature of complete lockdown and look at other ways to live with this virus in our midst,” said Moleko, who asserted that a balance should be found between restrictions and possible labour activities.

Even though the negative impact of COVID-19 is evident, this crisis might also be the trigger that Africa needs for economic development. “COVID-19 represents an opportunity for the continent to re-enter global markets,”, she said.

“After the Great Depression and even after World War II, many countries had to restart from scratch. Now we all have an opportunity to rebuild, reconfigure and restructure.”

Van Pletsen asked: “Africa, do we have to stand back for anyone else in the world?” when he compared Africa’s resources to those of India and China. Africa is home to 1.2 billion people, roughly the equivalent of India and China. Africa is also ten times the size of India and three times the size of China geographically. Half of Africa’s population is younger than 18 years old. “If this was material to work with, you would not find a better place to do so,” he stated.

Dr David Monyae, the co-director at the University of Johannesburg Confucius Institute (UJCI), pointed out that only 12% of Africa’s trade takes place within the African continent. This is another opportunity for Africa to look inwards for development, given that exports and imports are limited.

In closing, Wilmot Magopeni, the Executive Head of Business Development for FNB, shared a quote from Shakespeare: “There is nothing good or bad, but thinking makes it so”. Wilmot added that he sees vast opportunities in the continent.

It is clear from the panel discussion that Africa finds itself at a crossroads. And while it has the resources and the opportunities to make an economic come-back, the only people who will bring this to fruition will be Africans themselves.

*This article was written by MBA students as part of a group assignment for the module Perspectives on African Frontiers.

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covid-19 survival and recovery

South Africa’s survival and recovery options

USB News

South Africa’s survival and recovery options

covid-19 survival and recovery

  • APR 28
  • Tags Lockdown, COVID-19, coronavirus, impact, businesses, economy, development banks, government, public sector, markets, pandemic, GDP

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Guest lecturer in corporate and development finance at USB, Jason Hamilton, says South Africa needs a long-term growth plan after lockdown ends.   

The full impact of the pandemic and the health-related counter measures taken is starting to come through in the economic and financial forecasts. We have seen the South African Reserve Bank (SARB) in short succession review its outlook of the 2020 Gross Domestic Product (GDP) growth from 0.2% retractions (in March) to a 6.1% retraction at the last Monetary Policy Committee (MPC) rate announcement in April, which confirms how sharp and severe the impact has been on the economy.

South Africa is still in the beginning stages of the fight against the pandemic, with the view that SA’s infection rate will peak in September, although it seems as if positive impact has been gained when considering the flattening of the new infections curve. It is too early to accurately forecast how the coming months will play out which in turn, being directly correlated to any estimate of a recovery, makes predicting the full economic impact and recovery very difficult.

What has become clear is we will likely not see a sharp and quick economic bounce back many has been hoping for but will in all likelihood see a 12 to 24-month gradual recovery, once the pandemic is under control.

This is based on a few assumptions but mostly driven by the fact that the economy will take time to gain traction once the lockdown has been lifted as any form of claw back will be directly linked to a global recovery and ability to trade.

The ability to recover and its pace will also be directly linked to the ability of our trading partners to recover, this will add to the complexity to any recovery phase and also impact the timeline directly.

We also base the timeline of recovery on the assumption that the pandemic will be under control within the next few months, something that can only be certain once a vaccine is found and rolled out at scale, which could be 24 months away. In addition, the risk of a flare up remains high and we have seen this risk highlighted in China with increasing numbers of new cases.

Any narrative related to recovery and growth should be seen in context of what returning to ‘normal’ means and if this is even possible. Globally we have seen a slow down over the last few years with most developed economies’ GDP growth coming under pressure (can refer slowdown in China and very low growth in Germany and other EU countries), hence returning to normal will see us returning to a world that’s under pressure and possibly not able to sustain the levels seen historically.

In South Africa this is a slightly easier debate (and to understand) as our economy was under pressure for years prior to the pandemic and will remain so for the foreseeable future. The SA deficit which will be revised upward shortly was projected at 6.8% of GDP (R370bn) and this will breach the 10% mark to settle at some point between 10% – 12%, although we could see 14% being tested, resulting in a R544bn to R652bn deficit or at the upper end up R760bn which must be addressed in the revised budget and recovery plan.

What has become clear is we will likely not see a sharp and quick economic bounce back many has been hoping for.

We are predominantly dealing with a health crisis and all actions taken to date has been to limit the loss of human life, this is also clear with the updated stimulus package with significant allocations made to health and health response rated expenses. However, the impact of the pandemic is financial and could easily lead to a financial or economic crisis if not managed correctly through the short/medium term action taken and through the deployment of a carefully crafted long term recovery plan.

It is imperative that government and private sector remain focused on the immediate response and support required, hence spending on healthcare and protecting employment (and by default limiting as many bankruptcies during the process), we have seen further social stimulus provided to assist the vulnerable and unemployed through further grand allocations made. We will, however, require a strategic forward-looking view to be taken to ensure an integrated recovery plan is crafted.

We have seen elements of this coming through already if we look at the action taken by the MPC: It has reduced the repo rate by 225 basis points this year already. This will reduce debt costs and provide some reprieve but the full effect of rate changes take between 6 to 12 months to fully filter through the economy, which mean this action is also being done with a forward looking view and recovery in mind.

Given that South Africa has limited fiscal headroom there still remains a few viable options and strategies that can be explored in conjunction with the private sector to not only assist with the health crisis and bridging requirements, but also to be deployed in preparation and during the recovery phase.

Development Banks

The liquidity of emerging markets is under further pressure with foreign direct investment (FDI) being withdrawn and moving to what is perceived as safer assets and currencies. Since the beginning of the year over $100bn has been withdrawn.

Many nations are also reliant on remittance flows to fill the gap. In some cases this is significant, ranging between 10% to 20% of GDP. This will also reduce and could remain low for some time.

Both these implications can be addressed by increasing the special draw rights (‘SDS’) to assist nations with foreign currency that was lost due to FDI and the lower remittance levels seen. South Africa is a very well traded market albeit speculative and should be able to manage its foreign currency reserves through the cycle and is not reliant on remittance flows.

The impact of the pandemic is financial and could easily lead to a financial or economic crisis if not managed correctly.

In the emerging markets on average over 20% of budgets are used to service debt, In South Africa this is around 12%. Restructuring current debt terms and condition can assist in freeing up significant cash flows and provide much needed headroom over the coming 24 months. This can be done by freezing interest and/or placing a general moratorium on debt payments, either under current facility/bond terms or through a formal restructuring approach.

Development banks will need to look to increase lending and hence its allocation received to enable further funding to be provided. This could take the form of loans and even grants. Any additional funding provided now will need to be aligned to the crisis duration. Those provided for growth must be aligned to the underlying projects. As such, we should see increased tenors coming through to provide for longer lead times.

A significant portion of latest stimulus package of R500bn announced on the 21st of April will be sourced from global partners, the IMF, African Development Bank and Brics Bank, although the detail of this has not been announced as yet.

Development Finance Institutions

DFI’s are well placed to assist now and during the recovery as they are already invested and have direct local access in many cases. They further have local knowledge and a proven track records. They are best placed to assist current clients with support and new debt facilities, however they will need to relax credit and return criteria to increase the investment scope. They will also be required to provide funding likely linked to the profits of the company or project to provide the scope for the company to recover.

They will also have to consider providing debt moratoriums on current and new investments made to assist with the short- and medium-term liquidity requirements, again this can be done under current facility terms or through a formal restructure request.

In conjunction with co-investors on the private and public sectors (asset managers, government, PE firms, etc.) DFI’s can be accessed to fund recovery and growth projects, specifically health, manufacturing and infrastructure programmes. It is likely to be achieved by way of a convertible note point where additional risk is being taken.

Companies with strong ESG (environmental, social, governance) principles or alignment to the sustainable development goals (SDG) will be best placed to secure new investments and funding (Impact Investment) during the recovery as they will not only offer financial returns but also long-term sustainability.

Commercial Banks and Private Sector

Similar to DFIs, commercial banks and other financial services providers have well established processes and distribution systems in place with direct links to companies and individuals which enable them to assist in providing access to short term liquidity and bridging. This assistance will however still be provided on commercial assessment and risk terms, although we have seen regulations being adjusted (capital adequacy and liquidity ratios) to allow banks further headroom to increase its lending scope. Further movement here can be taken although care should be taken to not overextend in terms of risk and long-term viability.

Commercial banks can be used to provide further liquidity into the market over the short to medium terms and is best placed to also provide debt to firms during the recovery phase. However, if low or no interest rate borrowings is required or lending that is too far from the adjusted risk return profile, then external guarantees will be required, which has now been announced with a R200bn allocation made to be made by government, initially this will focus on firms with turnover less than R300m.  We can refer to the 2008 financial crisis to see what the implication can be if banks provide facilities to risky clients and hence if they are required to move beyond the regulated framework the support will need to be provided.

We will, however, require a strategic forward-looking view to be taken to ensure an integrated recovery plan is crafted.

Private debt held by institutional, local and foreign investors is a key funder and provider of liquidity for South African corporates. Companies can access liquidity here as well, if they are able to negotiate three to six months debt payment moratoriums. However, this has proven difficult if we look at what has happened in the US and EU private debt markets. Companies should however review their agreements to see what options are available to them. Governments have already provided opinion and guidance to the sector to motivate aligned action. We will likely see a step up in these actions if the market isn’t accommodating.

Government/Public Sector

Restoring confidence is one of the major factors needed to attract FDI. Specifically to fund a 3 to 5-year recovery drive. Despite investors seeking safer assets they are also still hunting for yield. Prior to the crisis, Emerging Markets and Africa provided great prospects. This appetite still remains, but to sustainability attract long term FDI governments will need to have a clear plan and act decisively in execution.

The budget was announced in February 2020 and will be reviewed. We will see funds being reallocated; we will also see further cost cutting taking place to free up needed headroom to ensure a focus on efficiency. In the latest announcement R130bn will be freed up through reallocations and details will be provided in the revised budget.

We could also see the selling of non-core assets being progressed as this option was noted during earlier announcements (including the revenue from selling broad bank spectrum).

The UIF and Government Employees Pension Funds have significant surplus funds available that could be accessed. There is also an under allocation across some of the mandated investments leaving headroom for allocation of additional funds which can be deployed as directly or co-investment. This can be a viable source of capital to assist during the rebuild and recovery phase. Access to the UIF funding reserves has been noted in the updated stimulus package as part of the R500bn package.

Private sector savings can be accessed directly or through the asset managers with regulatory adjustments (adjustment t prudential limits), which will increase the funds available for local deployment. This will require the review of return profiles and investment criteria to ensure alignment. As with DFIs, increased investment will be aligned to ESG/SDG projects and companies. This will require careful considerations as the funds have obligations to its beneficiaries which in most cases are the most vulnerable in our society, such as pensioners. But its technically is a viable funding source.

We will also see a renewed focus on the already established regional trade zones which can effectively be used to leverage trade and enhance relations. What is required is a unified approach, both during the crisis and for any recovery plan.

The African Continental Free Trade Area is an agreement that unifies the African continent and its 1.3 billion people which, if managed correctly, can put Africa in a very strong position by forming a unified trading bloc and creating a regional value chain. This could be the secret sauce that the content has been looking for and execution over the next 5 years is going to be crucial.

Stimulus could also be provided through reducing the tax burden on the private sector, ensuring more funding is available for reinvestment and investment. This can be done by reducing VAT and reducing company tax rates. However, this can likely be achieved through other incentives to drive right behaviour. What we have seen announced is the deferment of VAT, PAYE, Tax and other levies to assist and these have now been revised to provide further assistance.

South Africa is Africa’s most industrialised nation with a very sophisticated financial system, which provides it with a few options to consider and even the private markets that can be successfully accessed by government and local companies.

All the ratings agencies have SA at sub-investment grade, however this now provides the platform to rebuild and design plans to support a growth programme without having to worry about downgrade risk. A very slim but silver lining.

The pandemic has also proven that we are a global economy and reliant on each and every market for our own success. This unity and joint action will be the crucial factor that will determine our successful rise and recovery.


Jason Hamilton is director at First River Capital. He has over 15 years of experience in the banking and the financial services sector where he focused on corporate finance, project finance, leveraged and acquisition finance. He is Guest Lecturer on USB’s Development Finance Programme, present on Capital Raising for Public and Private Projects. He is also Guest Lecturer on USB’s MBA programme, present on Corporate Finance, Mergers & Acquisitions and Funding Strategies. He serves as Faculty at USB Executive Development, and Facilitator for USB’s International Affairs programme. He has been appointed to the Thought Leadership and Business Ethics Committee of AICPA (The Association of International Certified Professional Accountants) | CIMA (Chartered Institute of Management Accountants) effective 1 June 2020.

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Oil price south africa

Plunging oil price and SA economy

USB News

Oil price plunge and what it means for SA’s economy

Oil price south africa
(Source: https://www.pexels.com/photo/car-refill-transportation-gas-9796/)

  • APR 22
  • Tags Opinion, oil price, economy, South Africa, Sasol, lockdown

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Prof André Roux, head of our Futures Studies programmes at USB, comments on the plunging oil price and what it means for the South African economy.

The sensational drop in the oil price to -$37 a barrel on 20 April was recorded for West Texas Intermediate (WTI) crude, the benchmark for US oil prices. This crude is usually extracted from US oil fields in Texas, Louisiana, and North Dakota. The reasons for this unprecedented state of affairs are partly of a technical nature linked to pricing in the futures market for oil, along with the collapse in demand (some 30%) in the wake of international travel restrictions and lockdowns affecting 90% of the world population. Although OPEC, along with Russia and others, recently agreed to cut production in May by 10%, supply still far outstrips demand – to such an extent that storage capacity at land and at sea is becoming more and more difficult to find.

The Brent crude oil price is the international benchmark price used by the Organisation of Petroleum Exporting Countries (OPEC). While the price of Brent has not moved into single figures, it has nonetheless fallen to its lowest price in some three decades.

In the absence of a meaningful recovery in global demand (which will depend on how the health crisis unfolds), the major producers, including OPEC, Russia and the USA will have to slash production significantly in order to support the oil price. Meanwhile, one of the world’s largest and most powerful industries faces a plethora of risks – credit risks, banking risks, and unemployment risks.

Somewhere down the road (second half of this year), we could see a sharp recovery in oil prices as demand recovers in a post-lockdown era.

For financially-stricken South Africans and producers the lower oil price comes as a welcome respite, as record declines in the petrol price are being recorded (although price decreases are being neutralised to some extent by the weak Rand exchange rate). Bear in mind that the price could rise later in the year.

The biggest loser in South Africa is arguably Sasol and its shareholders and stakeholders. Sasol’s financial position had already been pressure due to its controversial Lake Charles Chemicals Project, which has been hit by monumental cost overruns. This, together with the oil price plunge, has seen the company’s market value plummeting to some R30 billion, from a R411 billion high in 2014. In the light of its debt burden of R120 billion, Sasol will have to either sell assets and/or exercise a rights issue.

*Professor André Roux is head of the Futures Studies programmes at the University of Stellenbosch Business School (USB). He was previously Director of the Institute for Futures Research (IFR) at USB from 1996 until 2015. Prof Roux’s areas of expertise are business economics and labour economics.

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StatsSA Covid-19 Survey

StatsSA Covid-19 Survey

USB News

‘4 in 10 businesses feel that they cannot continue to operate’ – StatsSA Covid-19 Survey

StatsSA Covid-19 Survey
(Source: https://www.pexels.com/photo/red-and-white-signage-3962259/)

  • APR 21
  • Tags COVID-19, lockdown, coronavirus, businesses, operations, survey, StatsSA

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Seraj Toefy, Custodian of Entrepreneurship at the USB, comments on the rapid response survey, conducted by Stats SA during lockdown, on how the current crisis is affecting businesses.

COVID-19: Four in ten business feel that they cannot continue to operate

The statistics paint a grave picture to the extent to which Covid19 is affecting businesses, and while it is comprehensive, it still doesn’t paint the severity of the overall situation.  In South Africa, we have a huge workforce that is paid weekly, and is most likely without income while the company they work for still hangs on to survive.  For many companies that will try their best to stay alive during this period, they are having to shed their weekly workforce and short pay their full-time workforce.  The devastation of the lockdown will be felt for months to come, as many people are putting themselves into further debt just to survive this period.

The devastation of the lockdown will be felt for months to come, as many people are putting themselves into further debt just to survive this period.

More about the survey: http://www.statssa.gov.za/?p=13236

I find it hard to compare the 2008/9 with the current situation only because of the sheer scale of what we are going through. In 2008/9 there were many sectors that were affected to a very small extent, and some countries and regions could ride the wave because of the different stages of economic cycles they found themselves in.  This crisis is all-consuming. There is NO person or company on the planet that is unaffected by this, and within that lies both the problem and the opportunity.  If everyone is going through this, then the strong, and those who are adaptable and resourceful, will not only survive but thrive after.

There is no person or company on the planet that is unaffected by this, and within that lies both the problem and the opportunity.

Another factor to consider is that the survey was done with companies that turnover over R2 million or more per annum.  Once again, in an environment like South Africa, we have thousands of smaller traders, formal or informal.  These companies or individuals will be suffering immensely because even though their overheads are low, their liquidity is very tight and they have very little cash on hand to ride out this period.  Even if they can survive to feed their family during this period, it is severely impacting their ability to bounce back when the lockdown is lifted because they are most likely living off their working capital.

The bottom line is that the COVID-19 crisis is very quickly shifting from a medical emergency to an economic one.  There is just way too little money in the fiscus.  Just like a giant machine with many cogs intertwined to make it work, without money in the system, the country grinds to a screeching halt. The longer we wait to lubricate the cogs, the harder it will be to get back up to speed.  We CANNOT afford to extend the lockdown in its current capacity.

Seraj Toefy USB*Seraj Toefy lectures Entrepreneurship at the University of Stellenbosch Business School (USB) and is Head of Africa at Centuro Global.

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#COVID-19: Possible alternative futures for SA

Possible alternative futures for SA

USB News

#COVID-19: Possible alternative futures for South Africa

#COVID-19: Possible alternative futures for SA

  • APR 08
  • Tags COVID-19, coronavirus, pandemic, alternative futures, scenarios, strategic thinking, futures studies

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USB’s Head of Futures Studies Prof André Roux and Futures Studies alumnus Gideon Botha explores four alternative futures for South Africa post COVID-19.               

*This article was first published in AccountancySA. Click here for the article online. https://www.accountancysa.org.za/covid-19-possible-alternative-futures-for-south-africa/

 

Barely a month ago we were bemoaning the grim outlook for the global and South African economies. The world economic growth rate recorded in 2019 was the lowest since 2010. Although a slight improvement was expected for 2020, the risks on the downside (for instance trade tensions, the outcome of Brexit, and rising levels of debt in emerging market economies) were reported as being fairly high. In South Africa, we entered a technical recession (two consecutive quarters of negative GDP growth) and growth forecasts for 2020 were lowered to less than 1%. Load-shedding became the norm; SAA was (and still is) under business rescue; the Budget Speech highlighted the unsustainable indebtedness of the government; the official unemployment rate was at 29%; and Moody’s ‘junk bond’ rating was seemingly inevitable.

No business and no consumer – whether rich or poor, big or small – will be immune to the direct and indirect economic effects of the pandemic.

Today (end March 2020) the expectations and realities mentioned in the previous paragraph look rather appealing. COVID-19 has already had an indelible impact on our values, expectations, and hopes as it infiltrates every crevice of economic activity. No business and no consumer – whether rich or poor, big or small – will be immune to the direct and indirect economic effects of the pandemic. Now the question globally and domestically is not whether there is going to be a recession, but how severe the recession will be and how long it will last. It is sobering to think that even the most favourable short-term outcome contains the word ‘recession’. Indeed, the COVID-19 pandemic already shows signs of being the most disruptive global event in modern history.

Indeed, the COVID-19 pandemic already shows signs of being the most disruptive global event in modern history.

As Nouriel Roubini (2020) points out: ‘[The] shock to the global economy from COVID-19 has been faster and more severe than the 2008 global financial crisis and even the Great Depression. In those two previous episodes, stock markets collapsed by 50% or more, credit markets froze up, massive bankruptcies followed, unemployment rates soared above 10% and GDP contracted at an annualised rate of 10% or more. But all of this took around three years to play out. In the current crisis, similarly dire macroeconomic and financial outcomes have materialised in three weeks.’1

South Africa’s four alternative futures

The alternative futures for South Africa relating to this crisis will be influenced by numerous interrelationships, which may play out in many different ways. One of the most decisive relationships is that between the transmission rate of the virus and society’s response thereto. Key considerations in this regard include the ability to ‘flatten the curve’; the institutional capacity  to enforce lockdown protocols; the capacity of the healthcare system to roll out widespread COVID-19 testing, tracing, and critical treatment measures; and the fiscal and monetary response.

COVID-19 has upended the world, causing considerable uncertainty and fear, but the next few months may also be a time of opportunity for South Africa and indeed the rest of the world.

Alternative futures are usually considered performed over a long period (at least ten years). However, in this case the next few weeks and months are critical, and for this reason, this article describes four scenarios based on the multi-state actuarial model developed by NMG Consultants and Actuaries (Pty) Ltd. This model is derived from a mathematical model used to analyse the reported infections in China from 10 January 2020 to 8 February 2020.

Overview of the multi-state actuarial model

The multi-state model forecasts the progression of a population across five model states as follows:2

  • The lives in the population who have not yet been infected with COVID-19 are allocated to a state labelled ‘susceptible’.
  • Those lives in the ‘susceptible’ state who contract the virus are allocated to an ‘exposed’ state.
  • After a latency period, lives in the ‘exposed’ state move to one of two ‘infected’ states:
  • A ‘documented infected’ state for those lives who are tested for COVID-19 and test positive that is, who are documented cases of the virus, and
  • An ‘undocumented infected’ state for those lives who, although infected, are not reported as such. The symptoms for this group could be mild or non-existent.
  • Lives who recover, die, or never contract COVID-19 are defaulted to a fifth state. The model allows for a movement from ‘susceptible’ to this fifth state.

A number of parameters are used to determine the number of lives who move from one state to another. The NMG model has been calibrated using the parameters from the mathematical model that was fitted to the infections in China. The following parameters are used:

  • A daily transmission rate of between 0.4 and 1.12 to determine the movement of lives from the ‘susceptible’ to the ‘exposed’ state.
  • A relative reduction parameter of 0.55 for transmission by lives in the ‘undocumented infected’ state.
  • A latency factor of 3.68 days that determines the length of time that a life remains in the ‘exposed’ state before moving to one of the ‘infected’ states.
  • An infectious period factor of 3.48 days that determines how long a life remains in the ‘infected’ state, and
  • A fraction of 0.69 determines the proportion of infections that are documented.

National forecast of reported infections

In figure 1, the lives allocated to the ‘documented infected’ state in South Africa based on the different assumptions for the daily transmission rate parameter in the model are plotted.

Figure 1 Projected infections based on the four transmission rate assumptions (Source: NMG Consultants and Actuaries (Pty) Ltd. )

 

The four alternative future scenarios are derived from the scenario curves shown in figure 1 based on the various transmission rates. These alternative futures scenarios are 1.12 (worst-case scenario), 0.80 (middle- of-the-road scenario), 0.60 (best case), and 0.4 (low probability).

The four alternative futures are discussed below followed by two models that could be used to deal with the high level of uncertainty and challenges the various alternative futures pose.

Alternative future scenario 1: Worst-case scenario

The worst-case alternative future scenario predicts elevated transmission rates resulting in a high probability that the ICU beds in both private and public hospitals (totalling 7 195) will be insufficient by the beginning of May. This could result in a war triage being applied to determine which patients are awarded one of the limited ICU beds and the cancellation of many elective procedures due to the unavailability of ICU beds.

The high transmission rate and the limited availability of ICU beds could create a more robust social awareness of the dangers of this pandemic and thus improve compliance with the government’s directives.

On the other hand, it could lead to social paranoia that could manifest in violence against people thought to have the virus.

In this scenario, there is also a high possibility of the 21-day lockdown being extended multiple times in an attempt to flatten the transmission curve and thus decrease the transmission rate, creating more capacity to treat patients needing hospital care. The Imperial College in London warns that the virus could return within weeks of the restrictions being lifted and thus to avoid this, countries may have to implement on-off cycles that need to be repeated until the virus has worked through the population.3

This scenario will probably have the longest lockdown period of all the scenarios and will therefore create the most severe liquidity crisis for businesses.

This scenario will probably have the longest lockdown period of all the scenarios and will therefore create the most severe liquidity crisis for businesses that are not deemed essential services and are thus unable to generate cash through either providing a service or selling goods during the lockdown period. This could lead to many businesses retrenching staff to avoid bankruptcy. Large-scale retrenchments and businesses filing for bankruptcy will create a credit risk for South African financial institutions. This scenario resonates with Nouriel Roubini’s notion of an I-shaped economic cycle − a vertical line representing financial markets and the real economy plummeting.4

The social effect of large-scale retrenchments will place strain on the greater society, as the affected households would need support from government through the UIF or from family to make ends meet. An extended period of lockdown and the possibility of job losses will also create psychological strain on society which could increase the prevalence of mental illness. However, this period could create a social reawakening as the pace of life slows down during lockdown, enabling people to focus on their inner lives through spending time in activities such as meditation. 5

Alternative future scenario 2: Middle-of-the-road scenario

In the middle-of-the-road scenario, the transmission rate is lower than in the worst-case scenario. The partial flattening of the curve and lower transmission rate allow more capacity to be created through alternative solutions before the demand for ICU beds exceeds the supply.

If South Africans are socially compliant during the initial 21-day lockdown, the extended lockdown could even be averted.

The probability of a further lockdown after the initial shutdown is likely, but the prospect of additional lockdowns after that will be lower as the transmission rate is considerably lower than in the worst-case scenario and the lockdown should flatten the transmission curve significantly. If South Africans are socially compliant during the initial 21-day lockdown, the extended lockdown could even be averted. This will have a significant economic and social impact on South Africa as it would decrease potential retrenchments and businesses going bankrupt.

Nonetheless, this resonates with the notion of an L-shaped cycle. Here, COVID-19 incurs significant long-term structural damage to one or more institutional contributors to production such as the labour market, capital formation, or the productivity function. In short, a sharp downturn followed by prolonged stagnation.

Alternative future scenario 3: Best-case scenario

In this scenario, the probability of the lockdown period being extended after the initial 21 days is significantly lower than in the worst-case and the middle-of-the- road scenarios. This probability could even be lowered further if South Africans comply with the government directives to flatten the curve and reduce the rate of transmission.

…it will be easier to restart business and production after only one 21-day lockdown period.

The best-case scenario will also create a sense of hope and optimism because it will have the least adverse economic and social impact on South Africa. Furthermore, it will be easier to restart business and production after only one 21-day lockdown period.

The notion of a U-shaped economic cycle is relevant here. The shock persists, and while the initial growth path is resumed, there is some permanent loss of output.

Alternative future scenario 4: Low-probability scenario

Given the actual transmission trend and trends across the world, this scenario is highly unlikely.

Should this scenario materialise, a V-shaped economic cycle could emerge. Here output declines, but economic growth eventually rebounds; on an annualised basis, annual growth rates could fully absorb the shock.

Where to from here?

From the alternative future scenarios described, it is clear that the extent of this crisis can be influenced either positively or negatively depending largely on the level of social compliance by the South African population to the directives set out by the government for the initial 21 days of lockdown. In fact, as much as COVID-19 is questioning conventional wisdom, causing considerable uncertainty and fear, the next few months may also be a time of opportunity for South Africa and indeed the rest of the world.

In fact, as much as COVID-19 is questioning conventional wisdom, causing considerable uncertainty and fear, the next few months may also be a time of opportunity for South Africa and indeed the rest of the world.

For all the destructive effects of COVID-19, there could be some positive changes to our world. For example, the virus has escalated the number of virtual medical consultations, which has the potential to grow in the coming years. Also, as the majority of staff work from home during this period, businesses and employees are forced to re-appraise the future of work, which may mean the end of large office buildings. This lockdown will force businesses to embrace the digitisation of business processes. The suspension of both local and international travel could encourage the extensive use of Skype and Zoom (this raises the question as to whether the need for travel will persist once the travel restrictions have been lifted). These are but a few examples where the world may be irreversibly changed for the better.

The question on many people’s minds is how to deal with the uncertainty that businesses, individuals and countries face. First, it is important to understand the difference between a complex system and a complicated system. The key differentiations between complex and complicated systems are set out below:6

  • The origin of complicated problems is found in causes that are individually distinguishable and
    can be addressed element by element; each input to the system has a proportionate output; the relevant systems are controllable and the problem these systems present have permanent solutions.
  • Complex problems and systems are resultant from the numerous interactions within the network and thus cannot be individually distinguished; the system needs to be addressed in its entirety and cannot be addressed in a reductionist way; small inputs could result in disproportionate effects; problems that the system presents cannot be solved once and for all but rather require to be managed systematically and any intervention tends to morph into new problems as a result of the interventions; and thus, relevant systems cannot be controlled and at best can only be influenced.

The effects of COVID-19 are taking place in a complex rather than a complicated social system and therefore when considering problems faced in this crisis, the attributes of a complex system as described above need to be taken into account.7

By viewing the world and our current crisis through the lens of a complex system, one can observe the emergence of unintended and unforeseen patterns and behaviours that cannot be attributed to any of the constituents within the systems8 but must be taken into account when making decisions to address the challenges brought about by this crisis. This calls for a mind shift in decision-making because a decision could present new challenges, or the consequences of a decision could result in an unintended outcome due to the numerous interactions among the different elements within the network that cannot be individually distinguished. This results in a process of continual learning and improvement within the system.

*This article was first published in AccountancySA. Click here for the article online.


Notes

  1. Nouriel Roubini, A greater depression? Project Syndicate, https://www.project-syndicate.org/commentary/ coronavirus-greater-great-depression-by-nouriel-roubini-03, 24 March 2020.
  2. NMG Consultants and Actuaries (Pty) Ltd, COVID-19 Actuarial modelling of the pandemic, 2020.
  3. Closed by COVID-19: paying to stop the pandemic, The Economist, https://www.economist.com/ leaders/2020/03/19/paying-to-stop-the-pandemic.
  4. Nouriel Roubini, A greater depression.
  5. Sohail Inayatullah and Peter Black, Neither a black swan nor a zombie apocalypse: the futures of a world with the COVID-19 coronavirus, Journal of Futures Studies, https:// jfsdigital.org/2020/03/18/neither-a-black-swan-nor-a- zombie-apocalypse-the-futures-of-a-world-with-the-covid- 19-coronavirus/.
  6. Roberto Poli, A note on the difference between complicated and complex social systems, Cadmus, 2(1):142–147, 11 November 2013.
  7. Op cit.
  8. Peter Checkland, Systems Thinking, Systems Practice, Chichester: Wiley, 1981.

About the authors

Prof André Roux is the Programme Head: Future Studies at the University of Stellenbosch Business School (USB) and Gideon Botha CA(SA) is a senior financial manager and Futures Studies alumnus.

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Life after lockdown

USB News

What does life after lockdown look like?

  • MAR 31
  • Tags COVID-19, Coronavirus, Lockdown, Economics, Corporate finance, Business, Development Finance, Industry, Investments, SARB, Moodys, EBITDA

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Guest lecturer in corporate and development finance at USB, Jason Hamilton, forecasts the covid-19 21-day nationwide lockdown will have on South African industry.  

The global COVID-19 pandemic has made its presence felt in South African retail and consumer-focused businesses, especially in tourism and hospitality, but the full impact on earnings, cash flow and employment will last far longer than a three-week lockdown.

With the 21-day nationwide lockdown in place, the full effects will now ripple through all sectors and industries at least until the end of this year – in an “economic cycle like no other we have ever seen”, says University of Stellenbosch Business School (USB) guest lecturer in corporate and development finance, Jason Hamilton.

Hamilton, a director at First River Capital, said with the South African economy already under severe pressure – the SA Reserve Bank (SARB) having revised its GDP forecast down to 0.2% for 2020 – it was expected that the impact of slowed-down global growth (expected to contract by 2.1%) due to the pandemic would see South Africa’s GDP retracting by between 2.5% to 3.5% with some models estimating up to 5%.

Moody’s downgrade of South Africa’s credit rating on Friday (27 March) would result in further outflows which the country can ill afford, he said, and the cost of debt would increase.

“Up to the lockdown businesses were able to trade and generate some earnings to keep the lights on, keeping employees employed and earning some level of income. A total lockdown will bring significant retrenchments across all sectors and industries, with cashflow and earnings under threat in businesses of all sizes.

A total lockdown will bring significant retrenchments across all sectors and industries, with cashflow and earnings under threat in businesses of all sizes.

“It is also looking likely that some form of control and restrictive measures will remain in place for months to come, which means we will be dealing with this until the end of the year – even if we look to China, which now has a flattening curve, they are more than five months into the battle against the disease while trying to keep their economy alive,” Hamilton said.

Data from the last 11 global recessions indicate that it takes on average a year-and-a-half for the economy to start recovering, but the current economic cycle is unlike any other.

“Recessions we have seen, and we have traded through them, and the average of 18 months to the start of recovery in theory gives us a timeline to follow. But the market sell-offs and economic cycle (reduced GDP growth or recession) we are busy entering is based on an event, not on fundamentals or underlying economic systems issues, which means it’s very difficult to predict how long and how impactful it will be.

“What we can, however, focus on is that it is event-driven and hence the recovery and comeback should be quick, the question is just when,” said Hamilton.

Interest rates – room to move

Unlike many developed economies where interest rates are already close to zero, Hamilton said it was a positive that the SARB still had “significant room to provide support of at least 300 basis points” even after the repo rate was lowered by 100 basis points, as the inflation outlook remains within the target midpoint.

“We have seen significant cuts in short succession from the economic powerhouses (US, UK, Germany, France etc) acting very quickly, which further supports the view that South Africa has further room and drastic action can and should be taken. The balancing act is, however, on inflation targeting and the exchange rate,” he said.

Access to liquidity will be key in the months ahead, he said, which would require direct action from government.

“Credit will need to be extended and/or restructured to individuals and companies to bridge cash flows as the trading environment tightens or, as in the case of a lockdown, grinds to a halt for many industries. This will require support from government, and the announcement by President Cyril Ramaphosa of the first phase of these is to be welcomed.”

…even if we look to China, which now has a flattening curve, they are more than five months into the battle against the disease while trying to keep their economy alive

Government & business support welcomed

Hamilton said the use of the tax system to assist firms with liquidity at the employee level by fast-tracking claims and reimbursements, and to delay up to 20% of PAYE for smaller businesses, was a positive move that would assist business – and recommended that further stimulus could come from deferment of VAT, provisional and income tax, and a higher percentage of PAYE deferred.

“The clear focus on SMEs and vulnerable sectors like the informal sector, with establishment of the independent Solidarity Fund, will support the public sector’s efforts and it is hoped that large businesses will follow the lead of the Rupert and Oppenheimer families which have allocated R1-billion each to the support initiatives,” he said.

Financiers (banks) have indicated their commitment to the national efforts and Hamilton said this would entail case-by-case restructuring of loans, likely through payment holidays or deferments to assist companies (and individuals) with three to six months’ grace to improve the underlying cash flows.

“This has been made slightly easier through relaxed regulatory requirements to free up head room from a capital holding point of view.

“Last week we saw the SARB taking further action to provide liquidity to the market through an active bond buying programme announced and increasing its refinancing operations to 3 months; and it’s likely that we will shortly see longer tenors on offer of 6 and 12 months,” Hamilton said.

Highlighting the knock-on effect of the economic challenges, he said further clarity would be needed in the real estate sector, as landlords would need the support of their funders or backers if they are to assist tenants with rent moratoriums.

The clear focus on SMEs and vulnerable sectors like the informal sector, with establishment of the independent Solidarity Fund, will support the public sector’s efforts…

Similarly, some firms might be able to approach their insurance companies with claims for loss of income, although this will in turn place the insurance companies under threat and likely facing liquidity concerns themselves.

National finances

With South Africa’s budget deficit projected to be just under 7% of GDP by 2021, the national finances are already under great pressure, Hamilton said.

Moody’s previously hinted towards giving South Africa time to recover, however any runway is now gone with the impact of the pandemic felt globally, and as such on Friday (27 March) they downgraded the country to below investment grade (Ba1) and maintained a negative outlook.

“A downgrade will result in further outflows which we don’t need right now, with foreign investors selling more than $41 billion in emerging market stocks and bonds since the beginning of the year, which is double that seen during the 2008 financial crisis,” Hamilton said.

There is slight reprieve, he said, in that the other ratings agencies have since 2017 rated South Africa as junk, which has seen investors price and treat the country as such since then, which has come through in the spreads of the credit default swap (CDS) markets.

“Although with this downgrade the debt cost will increase,” he said.

He said government remained in a difficult position with a projected 6.8% GDP deficit, about R370bn, to address, and “now also a stimulus package required to limit or soften the blow of the COVID-19 pandemic”.

“Moody’s in its statement reviewed this number up to 8.5% although in my view it will likely be at 10%, which means SA will over the medium term require much higher debt levels than previous modelled and for much longer,” Hamilton said.

Although economies around the globe have made available funds of between 1% to 4% of GDP, he said it was unlikely that South Africa would require the upper limit of such stimulus – “but this still implies a need of between R80 billion to R170 billion”. The UK and Germany have announced stimulus of at least 15% of GDP and the US 30%.

A downgrade will result in further outflows which we don’t need right now…

“The impact will be felt but most of these funds could be sourced from within the current budget through reallocation of non-essential or non-critical spending. Yes, there is an element of borrowing from the future in this strategy, but current circumstances require drastic action, this is also in line with what we are seeing globally.”

Economic sector outlook

Accommodation and travel booking cancellations are the “first wave” of the impact on the tourism sector, with effects now moving into the hospitality sector, such as restaurants, bars and coffee shops.

The manufacturing sector has seen some factories close and Hamilton said it was likely that many would retool to assist with the manufacturing of medical equipment.

“The agricultural sector is a key driver of the economy and very reliant on international trade. As they are in the food supply chain, they will maintain a level of trading although with all the markets globally also facing a recession or lockdown, luxury agricultural products will suffer while staple foods are set to show more resilience,” he said.

Consumer-focused businesses will remain attractive for investors, Hamilton predicts, with those that have adopted online strategies “likely to weather the storm successfully as they have managed to adapt or pivot quickly in the response to the crisis and are best placed for what might be a big shift in buying behaviour post the pandemic”.

The key growth driver has been the Business and Financial Services sector and as they are also positioned to service clients remotely, they are likely poised to be able to bounce back quickly.

“The only sectors that will not be affected, or suffer the least damage, will be the essential service providers, being the food suppliers, food and medical supply chains and medical support providers,” he said.

No sector is immune to the impact and fall out of the crisis and survival has a lot to do with cash reserves and low debt positions, hence firms with net debt to EBITDA of less than one and healthy pre crisis operating margins are best placed to navigate the next few months successfully.

No sector is immune to the impact and fall out of the crisis and survival has a lot to do with cash reserves and low debt positions,

Investors

“How investors will navigate this crisis from an investment and cash flow management point of view, is also an important consideration. Globally, and this holds true for South Africa as well, there are significant amounts of capital allocated for new and follow-on investments – available capital sums are at historic highs.

“This also suggests that investors in SME’s and other private businesses, and the listed space as well, have the ability to inject further funds through debt and equity packages into investee companies to support and navigate the coming months,” Hamilton said.

This will have a lasting impact on the companies’ finance and potentially their shareholding structures, as any equity raised or injected will come with very specific conditions.

He said some of the development finance institutions (DFIs) active on the continent had specifically stated their support to investee companies in ensuring employees can be supported through these times. Similarly, in South Africa, the IDC and the Department of Trade and Industry have allocated R3-billion for specific investments in critical businesses, with applications to be fast-tracked.

Hamilton concludes that “2020 is viewed as a lost year for many but we also have to look back in history and see what has been overcome before.

“It is up to all of us, the people and nation of South Africa, to unite and jointly fight this pandemic and with government, business and the public aligned we will overcome.”

Jason Hamilton is director at First River Capital. He has over 15 years of experience in the banking and the financial services sector where he focused on corporate finance, project finance, leveraged and acquisition finance. He is Guest Lecturer on USB’s Development Finance Programme, present on Capital Raising for Public and Private Projects. He is also Guest Lecturer on USB’s MBA programme, present on Corporate Finance, Mergers & Acquisitions and Funding Strategies. He serves as Faculty at USB Executive Development, and Facilitator for USB’s International Affairs programme. He has been appointed to the Thought Leadership and Business Ethics Committee of AICPA (The Association of International Certified Professional Accountants) | CIMA (Chartered Institute of Management Accountants) effective 1 June 2020.

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From COVID-19 to a recession

USB News

From COVID-19 to a global recession: What’s next for Africa?

  • MAR 23
  • Tags COVID-19, Coronavirus, Global recession, Development Finance, Africa, Johannesburg Stock Exchange (JSE), SMEs, USA, China

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MPhil in Development Finance final-year students at USB, Livingstone Banga and Nii Darko Otoo, explored the connection between the spread of COVID-19 and a global recession. They delved into how this devastating domino effect could impact the future of Africa’s development. This article first appeared on the online publication The Zimbabwe Independent on 20 March 2020.

Historically, the world has experienced a recession, on average, once every decade. The major and most recent ones were the 1975 recession caused by the rising oil prices of the Organization of the Petroleum Exporting Countries (OPEC); the 1982 recession, which came about as a result of the United States Federal Reserve’s tight monetary policy to combat rising inflation; the 1991 recession caused by the oil price shock, and loss of consumer and business confidence; and the 2009 recession caused by a subprime mortgage crisis.

Global recessions do not just happen; they send warning signals.

A global recession happens when most or all of the world economies experience a slowdown in economic activity at the same time for an extended period of time. Global recessions do not just happen; they send warning signals. Certain economic indicators – such as unemployment trends, increased inflation rates, a slowdown in international trade, and an inversion of the yield curve in the bond market – have proven over time to predict a looming global recession.

The US unemployment rate has been hovering below 4% for the past year, reaching a 50-year low of 3,5% four times during the past 12 months. In the previous four recessions, unemployment rates reached record lows of below 6% when these recessions were striking. The US-China trade has been dropping over the past two years with a drop of close to US$200 billion in value in 2019 alone.

The yield on long-term bonds should have a higher yield than the yield on short-term bonds. When this economic principle is broken, a recall on long-term financial commitments to invest in short-term securities unsettles the market and a financial crisis (illiquidity) is bound to happen as borrowers will need to pay immediately what could have been long-term payables.

The yield on a US 10-year Treasury Note fell below the two-year bond’s yield several times during the past year, thus prompting some investors to recall their investment in long-term securities. This phenomenon, called an inversion of the yield curve, usually precedes a recession.

The global economic giants US and China have been waging trade wars on each other over the past year. Although they seem to have found a compromise, the economic impact of the exchanges was adverse for the global economy. These and other indicators have reached recession levels for over a year, and the global recession has long been overdue.

What can trigger a global recession?

The world’s second biggest economy, China, has been hit by coronavirus (COVID-19). This is a Severe Acute Respiratory Syndrome Coronavirus-2, a new strain that had not previously been identified in humans. As a new virus, no vaccine has been identified as yet and, according to US health experts, it will take at least a year to produce one. COVID-19 has spread from China to over 176 countries in less than 60 days. Over 60 million people have been quarantined in China and over 16 million people have been quarantined in Italy.

The International Energy Agency (IEA) expects global demand for oil to be down 2,5 million barrels per day, highlighting a slowdown in global economic activity. China oil demand went down by 1,8 million barrels a day, year-on-year, in the first quarter of 2020, indicating a major slowdown in Chinese economic activity.

Most economic activities have been suspended or banned in China, Italy and across the world. The US and China control close to 40% of the world’s economy and the two countries’ trading activity is also the highest in the world. Any adverse or positive economic activity in these two countries is set to have a ripple effect on the global economy.

Africa’s response to past recessions

Africa has its own challenges, which include having the lowest human capital development in the world, inadequate public infrastructure, poor governance, and energy and water problems. Over the past century, Africa has become interlinked with the world economies as developments in technology and transportation have made it easier for the movement of people, goods and services. Any negative economic activity on the global scale is sure to make Africa as a continent feel the effects as well.

Historically, statistics indicate the inability of the African continent to buffer itself against such a phenomenon.

Historically, statistics indicate the inability of the African continent to buffer itself against such a phenomenon. In the 1981-1982 recession and the 1991-1992 recession, sub-Saharan Africa’s Gross Domestic Product (GDP) was -0,2% and almost -2% respectively. Sub-Saharan Africa was not excessively affected by the 2008-2009 recession as its GDP dropped, but still remained in the positive at over 3%.

Global trade wars, such as the US-China trade war, including additional barriers imposed to reduce international trade, are causing a decline in economic growth in many countries. Import and export disruption is beginning to be felt worldwide, especially in the electronics sector and motor industry given China’s major role in components manufacturing and assembling. Within these past few weeks, commodity prices have come under pressure with crude oil prices plunging to 2008-2009 levels.

Can SA and Zimbabwe cope?

South Africa, one of Africa’s biggest economies, managed to buffer itself against previous global economic shocks. However, the political and economic environment in the country has drastically changed since the last recession.

The most possible scenario will be the scrapping of the local currency like what happened in the 2008 – 2009 period. A combination of poor health facilities and an unfavourable economic environment will sink the country deeper into both economic and social mess.

Budget deficits, electricity shortages, debates of land expropriation without compensation, political bickering, among others, have unsettled investors, negatively affecting the country’s economic prospects and also making the country susceptible to global economic shocks. The environment is aggravated by the COVID-19 virus global pandemic. South Africa has recorded 174 confirmed cases as of yesterday (20 March 2020). With a slowdown in global trade over the past month, the rand has weakened from about R14,80 to the US dollar in early February to R16,81 at the time of publication. It is expected that the rand will devalue further if the effects of a global recession sink into the already volatile economy.

The Johannesburg Stock Exchange-listed companies lost a significant percentage of value recently and the downward spiral is continuing. After recording 61 confirmed cases of COVID-19, of which 10 cases were local transmissions by 17 March, the South African government has set stringent measures which included a travel ban on tourists from high-risk countries, border closures, school closures, and limitations on crowd gatherings, among others, to combat the spread of the pandemic.

Will Zimbabwe follow suit or it will have to wait for COVID-19 cases to be confirmed? Will Zimbabwe be able to handle 100 cases or more of the COVID-19 virus and how will the largely informal market, which depends on South African imports, respond to a closure of the Beitbridge border post?

Weak African economies such as Zimbabwe are likely to face the severe brunt of the effects of a global recession and coronavirus. Around 75% of Zimbabwe’s total exports and 40% of its imports are done with South Africa. Any slowdown in the South African economy is most likely to negatively affect Zimbabwe.

Zimbabwe has not been economically stable for the past two decades and a global recession is set to have tremendous effects on the economy and the people who live in it. Previously recorded data indicated that the country’s GDP hit extremely low levels during global recessions.

In the 1981-1982 recession, GDP fell from about 13% to 3% in 1981 and 1982; in the 1991 global recession, GDP fell from roughly 5,5% to -9% in 1991 and 1992, and in the 2007-2008 global recession, GDP fell from -4% to -18% in 2007 and 2008.

Based on historical experiences, the country has lost about 10% of GDP every time a global recession has happened. With the GDP growth hovering below 4% for the past four years and a global recession looming, Zimbabwe can expect its GDP to fall by more than 10% this year alone as the underlying conditions have changed for the worst.

The country is facing a myriad of problems like daily electricity blackouts in most parts of the country, poor water quality and distribution in most cities and towns, and high unaffordability of telecommunications by the general populace. When the economy contracted in recession times, energy, communication and water crises were not as bad as it is at the moment. The current infrastructural and affordability gap is disastrous for the country and the ordinary inhabitant.

The local currency has been losing value from an exchange rate of ZW$3 to the US dollar in early 2019 to the current bank rate of ZW$18 to the US dollar or informal black-market rate of ZW$45 to the US dollar. The chances are high that such an unstable currency will lose more value when a global recession comes into play. The most possible scenario will be the scrapping of the local currency like what happened during the 2008-2009 period. A combination of poor health facilities and an unfavourable economic environment will sink the country deeper into both economic and social mess.

What can Africa do?

The looming global recession is unique and disastrous in that it affects both the economic and social aspects of a continent. Businesses are expected to scale down operations or eventually close down, thus negatively affecting employment and household incomes, with a downstream effect on the informal market. Worker lay-offs will most certainly happen as revenue falls and costs either increase or remain the same against dwindling incomes. Further deterioration of the local currencies is expected as investors move their investments from the fragile emerging economies to more stable developed economies.

Governments willing to do “whatever it takes” to stabilise economies in response to the COVID-19 outbreak must increase utilisation of their resources towards health care. In the short-term, public health concerns should be a priority over increased public debt.

A strain on the already deplorable African health system is inevitable and, if left unattended, Africa’s health system will sink deeper into a crisis and loss of lives will be a certainty. With the current economic challenges, private spending on health care might be the ideal panacea to managing both the spread of COVID-19 and proffering a long-term solution to the stability of Africa’s economies.

Governments willing to do “whatever it takes” to stabilise economies in response to the COVID-19 outbreak must increase utilisation of their resources towards health care. In the short term, public health concerns should be a priority over increased public debt. Fiscal measures should be geared towards providing free healthcare to those affected by the virus as an obvious response, as well as lenient tax requirements towards those hit by a sudden loss of revenue, especially in the informal economy.

While our appeals for increased public spending often raise fears of profligacy and subsequent financial trouble, there is a risk of a further drop in investor confidence. The combination of an aggressive monetary policy and fiscal interventions leave private investors in a “wait-and-see” position and encourage speculative trade as Africa’s sovereign borrowing rates may increase.

Indeed, since the global financial crisis of 2008-2009 and during times of low economic growth, African governments accumulated record levels of debt. Public debt across sub-Saharan Africa has surged by an average of 20% of GDP since 2010, nearing an average of 60% of GDP across sub-Saharan Africa in 2019.

On the part of the central banks, monetary policies ought to be directing credit towards production and employment creation, such as strengthening infrastructure or providing tailored credit lines to distressed small to medium enterprises (SME). The greater the virus-related disruption, the more distressed the SME sector will be.

African governments should immediately take crucial steps such as suspending all public gatherings, and curtailing travel and the movement of people to prevent COVID-19 from spreading. While the situation continues to evolve, companies are encouraged to take prudent steps to ensure business continuity given that ultimate progress of COVID-19 continues to negatively affect the world’s economy.

Livingstone Banga is a banker based in Zimbabwe and an MPhil in Development Finance final-year student at USB.

Nii Darko Otoo is a facilities management practitioner based in Ghana and an MPhil in Development Finance final-year student at USB.

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SA Skills inefficiency is the answer to SA's Economic reality

SA skills inefficiency is the answer to SA’s economic reality

USB News

SA skills inefficiency is the answer to SA’s economic reality

Unemployment crisis unpacked at University of Stellenbosch Business School (USB) Leader’s Angle.

SA Skills inefficiency is the answer to SA's Economic reality

  • Dec 05

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Unemployment in this country probably lies at the heart of our social, economic and political problems. Many people think that if we grow the economy it will solve the problem but it’s not that simple.

The how much of economic growth is not as important as the how of economic growth. One can have a growing economy, as South Africa has seen in the past few decades, yet unemployment has remained chronically high for many years. Due to the infinite gap between those who have and those who have not, the inequality in our country will be ongoing.

In discussing these very complex and complicated issues, the USB Leaders Angle, which was facilitated by head of