Founder: Turnaround Talk
Last week, I referred to the Wizard of Oz while writing an article reflecting on how the supply chain crisis will not be resolved this year. Like Dorothy, when faced with the disruption that we are currently experiencing, we may be tempted to think that we are living in a bad dream.
I will echo the sentiments that I made last week; we cannot simply click our heels together and whisper “there’s no place like home” hoping that this nightmare will disappear. A lot of us are optimistic that we are finally gaining momentum and are overcoming the worst financial impacts of the Covid Pandemic. Even South Africa is optimistic about our economic future.
Don’t crack open the champagne bottles just yet. As a recent thought leadership piece by the World Economic Forum (WEF) points out, the Pandemic is not the end of the world’s problems. The article points out that major challenges facing the post-pandemic world include rising inequality, climate change, digitalisation, demographic shifts and the weakening of democracy. To counter this, there is a need to rebuild domestic and global institutions so that they better harness the power of large corporations and can redirect technological change. The global financial system also needs to become more resilient, including through regulation covering potential risks related to digitalisation.
Putting societal issues aside (which is the realm of Government and not BRP’s), what are the risks that we need to pay attention to going forward?
The need for new institutions and global cooperation
As we have already seen in South Africa, the WEF article points out, to counter the economic challenges associated with a Post Covid recovery, we need to rebuild domestic and global institutions capable of harnessing the power of large corporations and significantly redirecting technological change. The article adds that, at the same time, better regulation of technology is required so that the composition of innovations is tilted away from technologies that pollute the environment and cause climate change. There needs to be an increased focus on human-friendly technologies that are capable of creating employment opportunities for a broad range of skills.
Climate change calls for global cooperation and more specifically for a global carbon tax – probably of no less than $150 per metric tonne of carbon, which is in the neighbourhood of the level of carbon tax in Sweden today – complemented by aggressive and immediate subsidies to research in renewables and other green technologies, including storage and transport technologies and a smart grid for the allocation of renewable energy. This means that the aspirations of the Hydrogen Economy becomes increasingly important and the associated economies that are created around this will become important economic drivers.
Photo By: Canva
New risks in a financially integrated world
The WEF article points out that one of the trends that has shaped the contour of the evolution has been the slowing but upward trend of international financial integration among advanced economies and emerging market and developing economies (EMDEs). The volume of global financial transactions seems disproportional to any fundamental economic need or activity, yet it produces a system prone to fragility.
The article adds that another trend is emerging evidence of a global financial cycle in which global asset and commodity prices, capital flows, and bank borrowings move in a synchronised pattern. While high-income economies seem to absorb the resulting shocks relatively easily due to deeper and more fluid financial markets, their wealth, the generally greater credibility of their policy frameworks, and elements of the global financial safety net (GFSN) from which they benefit disproportionately, for emerging markets the close linkage between the global financial cycle and growth raises the important policy issue of the extent to which a flexible exchange rate system can insulate EMDEs from shifts in global financial conditions.
The WEF article points out that EMDEs could be vulnerable to sudden stops in the near-term future in the next contractionary phase of the global financial cycle, for two main reasons. First, there has been an uneven rollout of effective vaccines across the globe, which might threaten recovery in many EMDEs. Second, EMDE fiscal responses to the crisis have made them even more vulnerable to hikes in advanced-economy interest rates – which may already be setting off a contractionary phase of the global financial cycle. The concentration of new sovereign debt issuance on domestic bank balance sheets in a number of EMDEs presents the possibility of a sovereign-bank doom loop.
Reforms for a more resilient global financial system
What policy reforms are necessary to make the global financial system more resilient?
The WEF article calls for expanding the regulatory perimeter to non-bank financial intermediation, where risks have shifted in the wake of tighter bank regulation; extending the scope of bilateral central bank swap lines as part of the GFSN; revisiting the use of capital flow measures as part of a larger toolbox to enhance stability in small open economies; and a new architecture for sovereign debt restructuring, which might be needed in the wake of rising sovereign debt burdens in many emerging markets.
Photo By: Canva
Challenges for financial systems
Several WEF articles discuss the shorter- and longer-term challenges for the financial sector, both related to the exit from the pandemic and consequent economic crisis and to the challenges posed by economic transformation, digitalisation, and climate change.
As societies emerge from the pandemic, sequencing of exit strategies from government support is important to avoid cliff effects and scarring, but also in terms of how quickly the economy can recover and manage the necessary resource reallocation process. Beyond the exit from direct support measures for corporate and financial sectors are the challenges of monetary policy normalisation and fiscal consolidation, with different countries and regions of the world facing different challenges and needs for policy normalisation.
The WEF article referenced in this editorial points out that, beyond the immediate challenges, the banking system has undergone structural changes over the past decades that have changed its role in middle- and high-income countries. While the share of credit to households rather than enterprises has increased, the corporate sector has seen an increasing role for intangible assets, which are harder for traditional banks to finance than tangible assets – a trend that can also explain increased cash holdings by corporates. Banks’ activity mix has expanded towards non-intermediation businesses, while tighter bank regulation has raised the importance of non-bank financial intermediaries.
These trends have changed the way we think about the relationship between the financial system and economic growth, but also stress that we have to look beyond the traditional banking system towards other segments of the financial system, including private equity and debt providers.
What does this mean for BRPs?
Fortunately for BRP’s, the challenges that the world faces presents ample opportunities for BRP’s.
Operational models will need to be addressed in order to build the companies that are needed to strengthen the economic recovery in a post Pandemic world. Issues such as agility, cash flow, business optimisation and looking at businesses beyond their four walls are all skills that are best done by professionals who do it on a daily basis and can do it objectively.
Secondly, we made mention of the Hydrogen Economy and the associated business opportunities that it will create. BRPs will need to assist in building economies of scale that will transform South Africa into the renewable energy giant that we have the capability of becoming.
Finally, we need to move beyond distress to enabling companies to undertake informal restructuring measures to address the challenges that their companies face before they become financially distressed.
