EDITORIAL: Falling credit extension to private sector could be a blessing in disguise
On the face of it, it is depressing to see that SA companies are not rushing to their lenders for new credit lines given that the government’s economic revival project rests on private sector-led investment spending.
But one can take solace in the fact that businesses have rather used these times of uncertainty both on pandemic and policy fronts to fix their balance sheets and pay down borrowings racked up a year ago to build cash buffers when large swathes of the economy were shut down.
According to the latest Reserve Bank data, private sector credit extension continued its downward spiral in April, contracting to 1.8% due to a slump in corporate demand. Loans to companies fell nearly 6% year on year, the sharpest rate of decline since November 2009.
To be fair, the so-called base effects are behind the drop because at the same time a year earlier, companies were in a frantic scramble for cash: forcing their employees to take deep pay cuts, selling assets, embarking on equity fundraising programmes and drawing down on their credit facilities.
Banks provided more than R165bn in financial relief to their corporate clients as at end-February 2021, according to the Banking Association SA, the industry lobby group. It is not unreasonable to imagine that the bulk of that was extended in about April 2020 when whole industries were ordered to shut down.
No wonder President Cyril Ramaphosa’s centrepiece package — the R200bn loan guarantee scheme aimed at providing a soft landing for small businesses — barely got off the ground with just less than 10% of the original amount doled out.
Looked at the other way, the trajectory of the private sector credit extension to businesses could turn out to be a blessing in disguise.
To begin with, it shows that companies are actually generating cash, as pointed out by Citi analyst Charles Russell in this newspaper, which is never a bad thing. Second, few would dispute that highly leveraged companies are more likely to cut back on capital expenditure than well-capitalised firms, especially if their profits are not enough to pay down their borrowings.
One can only hope SA companies, many of which have permanently reset their businesses with necessary cost cuts, are now using excess capital to prepare their balance sheets for a hoped-for economic recovery.
And by the look of things, if Standard Bank and Absa profit guidance for the first six months of 2021 are anything to go by, companies appear to have dodged the worst-case scenarios as both lenders say they have started to release billions of rand in reserves they had set aside for a wave of defaults.
Even so, it is difficult for executives to convince shareholders that rolling out factories and other capital expenditure projects upstages paying down debt at the moment, given the pace of the vaccine rollout and numerous false dawns even for the lowest-hanging fruit on structural reforms in an economy that is not expected to return to 2019 levels until at least 2022.
While targeted lockdowns bode well for businesses, getting our vaccination rollout programme right and pushing through structural reforms, especially in the energy industry, can unleash a wave of new corporate investments into the economy that on Tuesday logged another unwanted record of groaning under one of the world’s highest unemployment rates.
Since the late 1980s, according to the World Bank, SA’s gross fixed capital formation — a macroeconomic concept that shows private sector spending on fixed assets such as buildings and machinery — has barely changed since the late 1980s, languishing at 15%-20% of GDP. In comparison, emerging countries in Asia have seen a steady increase in investment over the same period, from 25% to almost 40%, helping them rack up decades of growth that propelled some of them into the ranks of the advanced economies.
If we want to get there and lift millions out of poverty, men and women at Operation Vulindlela must make good on their promises to accelerate critical reforms.
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