Tuesday, November 24, 2009

Time to cut losses and skill up

David Shapiro cuts to the chase about what makes South Africa sooo uncompetitive.

Economy can ill afford to humour obsession with BEE

by David Shapiro

The big talking point on the JSE last week was the level of bad debts that companies had written off their profits.

JDGroup, the durable goods retailer, generated an operating profit of R1.76-billion for the year to August31 before providing for debtors' costs - a polite term for customers who bought goods but failed to pay.

Impairments for the period under review amounted to a whopping R1.1-billion, shrinking profit to a disappointing R660-million.

It's unfair to single out JD Group. The management teams of dozens of businesses worldwide failed to forecast a slowdown in business activity.

Admittedly, the collapse of the global economy caught everyone off guard - but it is astounding that with all the numbers, information and sophisticated risk management systems available today, virtually no one was able to foresee the crash.

Although JD Group believes its troubles have reached the nadir, it remains cautious about the future. Householders, it advises, have simply lost their appetite to spend, emphasising a preference to run down debt or build savings. Faced with the prospect of job losses, increased electricity charges and possible higher taxes to fund a ballooning budget deficit, their anxiety is understandable.

Which is why it baffles me that local interest rates remain so high. Despite a 5% reduction in rates, retail sales continue to deteriorate. Hence, it hardly appears likely that further cuts will trigger a significant push in demand and threaten a rise in inflation; instead, a reduction will allow beleaguered consumers and businesses the room to reconstruct their balance sheets.

Still, it's not only at the low end of the market that delinquencies were encountered. Investec, a bank that gained its reputation on funding professionals, reported a hefty drop in re-turns from its private bank.

One would have assumed that a business with a more affluent customer base would have been better positioned to deal with the economic downturn.

There are perhaps two explanations: the bank overextended its loan book to clients to support dodgy commercial ventures; or the extensive write-downs were connected with souring BEE deals. It was probably a combination of both.

The gossip press has recently featured stories of Investec's problems with sizeable loans advanced to certain flashy, high-spending businessmen to bankroll some bold property developments - which the bank does not deny.

But when it comes to unmasking potential losses on BEE transactions, the banking industry seems sworn to omerta - the code of silence employed by the Mafia.

Gathering information on the status of some BEE contracts is almost impossible, although one doesn't require a doctorate from Harvard to figure out than many of the recent empowerment arrangements are floundering.

Deals were structured on the hypothesis that a continuing rise in share prices and an ever-increasing dividend yield would provide the revenue flow to cover debt.

The prospect that stock markets might plunge and that the economy would grind to a halt was not even a consideration.

From outset I challenged the government's empowerment plan, preferring a policy that focused on creating jobs and uplifting skills.

I concede that the strategy has enriched an elite group of people who were quick to recognise the opportunities, but the vast majority of quality workers who occupy key positions in business today made it on their own, without the aid of sponsored programmes.

My primary concern, though, is the huge universe of unemployed adults who have gained little from transition initiatives and still rely on hand-outs for their survival.

The country faces some tough challenges in the years ahead. JDGroup's results demonstrate that consumers remain loaded with debt and possess limited latitude to increase their spending on anything other than essentials.

Businesses, too, are being constrained by the global contraction and are hardly in the mood to expand their operations. Of course, this means that the government's revenues will come under pressure, severely undermining its social welfare projects.

The only way out of the mess is to lay down a new agenda that shelves the government's obsession with transition and, instead, centres on uplifting the skills of the unemployed and liberalising our anti-competitive labour laws.

2 Opinion(s):

Anonymous said...

Hey Dave, don't sweat it. The SA taxpayer will just pick up the bill for the welfare cheques to all these adult non-workers. No worries mate.

In 1993 at the tender age of 23, I applied to United Bank for a loan for R3000 for a deposit for a car. I had a full time job; a tertiary qualification and almost no debt to my name but the bank refused my request as I was a risk. Nowadays, these same banks are throwing money at people who can't afford it...mostly the bleks. Then, people ask why there's rampant inflation and that capitalism is evil....Makes you think.

Anonymous said...

Tears fail me to cry for our poor banks. Screw them. May they eat the fertiliser they dish out to decent clients.