Life after lockdown: Survival of the fattest
South Africa’s state of national disaster, lockdown and regulations have restricted movement of people, curtailed the free market and blurred the lines between business, government and society, raising the question of how their roles and responsibilities might shift in a new, post-pandemic social contract.
University of Stellenbosch Business School (USB) visiting lecturer in Corporate Finance Brett Hamilton, said it was clear that the COVID-19 pandemic would lead to business failures, with the SA Reserve Bank estimating an additional 1 600 business insolvencies this year¹, while the “fattest” – those with the strongest cash reserves – would likely survive.
We find ourselves in one of the most uncertain periods of human history. It is blurring the lines between business, government and society.
“We find ourselves in one of the most uncertain periods of human history. It is blurring the lines between business, government and society. Policymakers are confronted with an unprecedented, and impossible, trade-off between public health and economic growth.
“Given the speed and uncertainty under which these complex decisions are made, we have seen unprecedented actions from governments, central banks and businesses. In many cases, governments have overstepped their usual political and ideological boundaries and business has somewhat embraced stakeholders over shareholders.
Fighting the spread of the coronavirus requires ‘big government’ and ‘business with a heart’ to work together.
“Fighting the spread of the coronavirus requires ‘big government’ and ‘business with a heart’ to work together – it may be expected and the right thing to do in a crisis, but the question is if these roles will remain after the pandemic,” he said.
Hamilton, a director at First River Capital, said cashflow was “the lifeblood of any organisation” but lockdown had severely restricted businesses’ ability to generate cash through operations, while accessing cash through debt or equity investment were limited in the current economic climate, and possibly unwise.
The latest downgrade by Moody’s of South Africa’s credit rating to sub-investment grade severely restricts the country’s access to debt and has seen a spike in the cost of debt, he said, noting that the South African 10-year government bond yield reached a maximum of 12.36% on 24 March compared with a low of 7.9% in 2018.
“So, debt may do more harm than good during these times, even with the debt relief pledges made by banks,” he said.
This leaves “Alpha companies” – large, mature and cash-flush – in prime position to “weather the storm, buy out their competitors and continue to invest for growth after the pandemic”, he said.
“Markets will become more concentrated and the position of incumbents more entrenched. The business world will look different after the pandemic and it will most likely fall on governments to regulate the new ‘Alphas’ to ensure better competition. If it should do so and how it should be achieved remains to be seen,” he said.
Hamilton said the shifting of roles brought about by the pandemic raised the question of the role of companies in the market: “Is it to ensure its own survival, by accumulating cash, or to stimulate growth at all costs? If companies decide to pursue stimulus over being conservative (retaining cash for rainy days), what responsibility then do governments have to support businesses that now have no further cash holdings due to operations being suspended by the pandemic and lockdown?”
During the pandemic we have seen many companies shift to a more socialist stance, offering free products, expertise and financial aid to their employees and to other virus-related efforts.
“During the pandemic we have seen many companies shift to a more socialist stance, offering free products, expertise and financial aid to their employees and to other virus-related efforts. Is this perhaps the dawn of a new social contract?”
Hamilton pointed to a 2017 report funded by the South Africa Department of Trade and Industry and published by the University of Johannesburg’s Centre for Competition, Regulation and Economic Development² which held that South African companies were accumulating reserves as opposed to investing it in the economy and, thus, stimulating economic growth.
The report noted that between 2005 and 2016, the cash reserves of the top 50 companies on the JSE increased from R242-billion to R1.4-trillion and called for policy intervention from government to stimulate domestic investment by these companies and put an end to the “investment strike”.
He said that while there were counter-arguments to this – that “cash hoarding” was a myth and merely a reflection of the business environment at the time³– if government policy had been used then to force South African companies to spend their cash holdings, fewer would now be in a position to weather the current storm.
“This could support the view for lower government involvement in business and the protection of the free market. That being said, government intervention during the pandemic has not only been welcomed by many, but in most cases has been expected. Similar to the financial crisis of 2008/9, governments have moved to act to protect the free market, but in many countries the interventions for the coronavirus have been more radical.
“Putting a freeze on the free market by way of lockdown is counter to the political and economic ideologies of many countries, but they have acted nonetheless,” he said.
Government intervention should also focus on the ability of the economy to recover after lockdown has lifted.
At the same time, he said, government intervention should also focus on the ability of the economy to recover after lockdown has lifted – “to ensure that enough businesses remain standing and that people are employed through the crisis to quicken the pace of recovery after the pandemic”.
“What is required is the ability for companies to maintain payroll, gain access to debt financing and for central banks to provide the latitude for banks to reschedule loans (possibly with forbearance through credit guarantees). For this, governments must pull out all stops in terms of fiscal action,” Hamilton said.
With South Africa’s “limited fiscal latitude”, external finance would be required and should be accessed from as many sources as possible, including bonds, accessing the capital market, as well as a reliance on development banks such as the IMF.
¹SA Reserve Bank. Monetary Policy Review. April 2020. https://www.resbank.co.za/Lists/News%20and%20Publications/Attachments/9839/Monetary%20Policy%20Review%20%E2%80%93%20April%202020.pdf
²CCRED. 2017. Companies hoarding R1.4-trillion in cash. CCRED article. 4 August 2017. https://www.competition.org.za/seminars/2017/8/4/companies-hoarding-r14-trillion-in-cash
³Tambo, O. & Theobold, S. 2017. The myth of corporate cash hoarding. Intellidex research report. September 2017. https://www.intellidex.co.za/wp-content/uploads/2017/09/The-Myth-of-Corporate-Cash-Hoarding-Final-Report.pdf
Brett Hamilton is a visiting faculty member at the University of Stellenbosch Business School (USB), where he teaches Corporate Finance and Decision Analysis (Managerial Statistics) in the MBA programme – as well as short-term classes for various academic institutions in South Africa and abroad.