Turnaround market watch

Turnaround market watch - private sector

jan@corprenewal.co.za (Jan van der Walt) — Tue, 07 Apr 2009 06:18:51 PDT

Turnaround in the private sector

The South African private sector turnaround market has been relatively quiet after the busy days of the late nineties. However, signs are pointing to a contracting economy - even a recession - and more work for the turnaround industry in 2009.

From a robust to a contracting economy

After experiencing unprecedented growth until 2007, South Africa now faces a looming recession as a result of the international credit crunch and economic slowdown.

During the 4th quarter of 2008 the economy already contracted by 1,8%. Economic indicators, including manufacturing output numbers, indicate a further weakening of the economy.

The economy contracted 1,8% in the fourth quarter last year and indicators, including manufacturing output numbers, point to further weakness in the first quarter this year, putting it on course for a first recession in 17 years. Inflation has also slowed since peaking in August last year, although at 8,1% year-on-year in January, consumer inflation remains outside a 3 to 6% target band.

Business confidence has declined from its highs 2004 - 2007, as evidenced by trends in both the SACOB Business Confidence Index and the RMB/BER Business Confidence Index (see graphs below).

New business rescue legislation

Draft business rescue legislation as contained in Chapter 6 of the Companies Bill, 2008 was approved by both houses of Parliament in November 2008, but it was not signed by the President in December 2008 as expected. Speculation is that the new legislation will be signed after the April 2009 elections.

Enacting this legislation will provide the turnaround industry with a substantial boost as it has in overseas countries where modern business rescue legislation has been introduced. It is, however, not expected to become operational before the middle of 2010.

Interest rates

Interest rates reached its lowest point in 24 years before increasing by 4,5 percentage points from June 2006 to June 2008 in an attempt to curb inflation. Interest rates, however, have dropped rapidly by 2,5 percentage points from December 2008 to March 2009 in an effort to stimulate the economy. Whilst inflation is lower after its August 2008 peak, it stubbornly remains outside of the targeted band of 3% to 6%, limiting options for future interest reductions. The Reserve Bank plans to meet every month this year except for July to make timely decisions in the face of global volatility.

Link to interest rates graph.

Liquidations - starting to rise?

Annual company liquidations leveled off in 2008, but monthly liquidations have been rising steadily since early 2008.

Liquidations are expected to continue the upward trend since 2004 as a result of tougher business conditions emanating from the global recession and credit meltdown. and in spite of the interest rate decreases over the past 3 months. Especially exporting commodity companies will be hardest hit by the recessionary economic outlook of the industrialised companies overseas.

Link to monthly company liquidations graph.

Link to annual company liquidations graph.

Read more about liquidations trends at liquidation statistics.

SACCI Business Confidence Index

Link to SACCI Business Confidence graph.

SACCI reported the following for February 2009:

"The spike in the SACCI Business Confidence Index is an indication of the uncertainty and seriousness of the current adjustments and corrections the global economy and individual countries are facing. There seems to be ambivalence in what the world economy is going through and what certain economies might be experiencing."

"By all indications the South African economy is in a serous slowdown and the debate seems to get sticky around the question of the technicalities and the definition of a recession. Given the quality of preliminary data and especially the data on the national accounts, it remains difficult to technically call a recession."

"What is important is that the negative factors in the economy seem to be overwhelming the positive factors. On that count the South African economy will be facing troubled times for the rest of 2009 and into 2010. Acknowledgement of the dire economic conditions and its underpinnings is very important from a policy point of view."

"The spike in the BCI and the data indicating a decline in for instance unemployment and liquidations is a case in point. The causes might be administrative rather than economic but remains confusing to business. Given the inconsistencies in assessments of the state of the economy and in published information on certain aspects of economic activity, confusion and uncertainty could develop. The spike in business confidence in February 2009, after a clear trend of deterioration in the business climate, is an indication of the uncertain business environment that business has to contend with. Business confidence remains under stress and a one month spike as was seen in the November 2008, does not represent a trend reversal."

"Domestically, there were positive developments that suggest a more business friendly turn of events. On the international front, however, the turbulent and still unsettled global credit and financial markets are leaving their indelible mark on the global economy and impacting real economic activity in South Africa. Although local positive economic developments had the better of global effects on South Africa in February 2009, recent (end of February 2009) data that became available on the RSA’s international trade was disturbing. The rand reacted negatively and the data brought home the necessity to adapt to the changing international environment or face dire consequences."

RMB/BER Business Confidence Index

Rand Merchant Bank and the Bureau for Economic Research report the following:

"The RMB/BER Business Confidence Index declined by 6 index points – from 33 during the final quarter of 2008 to 27 during the first quarter of this year. This is the lowest level in 10 years and implies that only about a quarter of respondents rate prevailing business conditions as satisfactory."

Link to RMB/BER Business Confidence graph.

"Since the previous survey global financial market turmoil increased sharply. Equity markets plunged, currencies were volatile, international credit markets seized up and commodity prices tumbled. Governments intervened on an unprecedented scale to save banks and prevent financial markets from grinding to a halt. What initially started as a banking crisis in the USA quickly developed into a global credit crunch affecting Europe, Japan and eventually emerging markets as well. Financial market turmoil has also begun hurting the real economy with most developed countries either already in recession or heading there, and growth in almost all emerging markets slowing down."

"South Africa has not been unharmed. The JSE All Share Index slumped by 30% from the beginning of September to reach a level of 19 000 by mid-November. Over the same period the rand depreciated by some 30%, falling to R10.50 against the US dollar. Besides such extreme volatility, and in contrast to developed (and some other developing) countries, banks and financial markets in South Africa continued to function properly without any form of government intervention."

"The timing of the global slowdown is unfortunate, as it coincides with (and is exacerbating) the domestic downswing. The impact of earlier interest rate hikes and higher inflation on the real economy is increasingly being felt and results from the fourth quarter survey show that the rate of contraction in real retail sales, manufacturing volumes and building activity either accelerated or remained at the same high rate as in the previous quarter. The failure of business confidence to follow the historical pattern is curious. In the past, the first signs of weaker business volumes and/or increased uncertainty were almost immediately followed by a decline in the RMB/BER BCI. We are not entirely sure, but there are a few factors that we presume have contributed to business confidence “decoupling” from declining volumes and profitability."

"Firstly, after the longest period of continuous growth in business volumes on record, it may be that some executives are slow to adjust their views or they regard the present faster deterioration in business volumes and profitability simply as a brief, passing phenomenon. Secondly, it may be that some view the current international financial market turmoil as too far removed to directly affect their businesses adversely, especially given that domestic banks and financial markets continue to operate normally. Thirdly, South African businesses are used to a high degree of uncertainty and volatility. They have coped with both sharp falls (in 1996, 1998 and 2001) and rises (2003 and 2004) in the rand exchange rate, as well as a sharp increase in interest rates over a short period in 1998. Perhaps these events have boosted companies’ confidence in their ability to handle difficult times and may have taught them not to over-react to the first signs of change. Finally, it could also be that most business people have become convinced that the next move in interest rates will be down and that the economy will gradually turn the corner next year."

"In the fourth quarter survey the RMB/BER BCI fell in only one of the five sectors covered. This is in contrast to the previous quarter when business confidence dropped across the board."

"New vehicle dealer confidence declined from an index value of 15 during the third quarter to zero during the fourth quarter. In other words, not a single dealer surveyed rates prevailing business conditions as satisfactory. The last time new vehicle dealer confidence was zero was 23 years ago, during the third quarter of 1985. The confidence of building contractors (41 during the third quarter and 42 during the fourth), manufacturers (30 and 31 respectively) and retailers (49 during both quarters) changed little. However, as highlighted earlier, the stable confidence levels mask the accelerated contraction of manufacturing production and retail sales volumes, as well as the same high rate of decline in building activity reported by respondents during the fourth quarter. Wholesaler confidence increased from 33 to 44 over the past two quarters. This increase can partly be attributed to a correction after an overly sharp fall during the third quarter."

"Real GDP growth showed a marked decline during the third quarter. This was preceded, indeed predicted, by the sharp fall in the RMB/BER BCI during that quarter. The continued low level of business confidence, together with the other survey results - especially those in respect of business volumes - point to another dismal performance of the economy during the fourth quarter of the year. It is therefore possible that the RMB/BER BCI will decline further once there is a realisation that the drop in business activity was not temporary and the global financial turmoil increasingly hits home through weaker foreign import demand and lower investment. That said, falling commodity prices (reducing input costs) and the increased likelihood of interest rate cuts (lowering the cost of finance) should prevent business confidence from falling as low as the previous record low level of 10 index points reached during 1980s.

Prospects for the private sector turnaround market

The turnaround industry is expected to pick up in 2009 as a result of deteriorating economic conditions, and even more so in 2010 as new business rescue legislation introduced.

Turnaround market watch - public sector

jan@corprenewal.co.za (Jan van der Walt) — Mon, 06 Apr 2009 16:56:44 PDT

Turnaround in the public sector

In contrast to the private sector, turnaround in the public sector is buoyant.

Turnaround and transformation programmes are driven by government striving for increased service delivery and increased financial performance.

The turnaround at the South African Post Office by Maanda Manyetse, who has since left for MTN (and who has moved on again), seems to have run its course, and very successfully so.

Extremely successful turnaround and transformation programmes have been executed at the South African Revenue Services (Pravin Govender).

Parastatals undergoing turnaround action are Transnet (ex-Maria Ramos, now under acting Group CEO Chris Wells), South African Airways (ex-Khaya Ngqula, now under acting CE Chris Smyth) Denel (ex-Shaun Liebenberg, now under acting CEO Talib Sadik), SABC and the Land Bank.

It is understood that the turnarounds at Denel and SABC are not going well, with allegations of financial mismanagement and irregularities at SABC and the Land Bank.

The 2004 Babani turnaround programme at SAA has failed, and was replaced by a second turnaround programme devised by US-based airline management and consultancy firm Seabury Airline Planning Group. But CEO Khaya Ngqula has just been dismissed, and SABC are facing charges of price fixing.

At the Department of Home Affairs, a second turnaround programme has been announced in April 2007, with Mvuso Msimang, who accomplished the SITA turnaround, that moved over as Director General of the department.

Initiatives are under way at local government level to place municipalities on a sound financial footing and improve their service delivery. Sponsored by National Treasury, a programme for municipal management has been launched at Wits Business School.

The public sector prefer the international management consultancies or local BEE consultancies to help improve results. With the exception of some parastatals, the approach is often more that of business transformation rather than conventional turnaround.

Accordingly, there is little demand for the services of the established turnaround practitioners from the private sector.

Government itself facilitates labour consultation based turnarounds through ProductivitySA by subsidising the fees of private sector consultants who bring in projects and follow the NPI's turnaround and labour consultation methodology.

Government's rescue plan for SA vehicle sector

The entire automotive industry has been severely affected by the global downturn.

A task team led by the Department of Trade and Industry is considering a three-pronged plan to rescue the automotive industry, including tax adjustments to stimulate demand for cars. The team, which includes industry and labour representatives, was set up as part of a South African response to the global economic crisis, thrashed out in the National Economic Development and Labour Council (Nedlac). The framework envisaged a dedicated response to help ailing industries, including the automotive sector. Industry players were not prepared to discuss the details of the plan, which is expected to be finalised by month-end, but it is understood that the rescue package will stand on three legs:

Bridging finance to help cash-strapped car manufacturers’ balance sheets provided by the Industrial Development Corporation (IDC). An industry source stressed that the finance would not be a bail-out, but loans that have to be repaid;
Tapping into Department of Labour and Manufacturing, Engineering and Related Services Sector Education and Training Authority funds for on-the-job training to minimise retrenchments, while additional funds from the Unemployment Insurance Fund could be allocated to help workers already retrenched. The loss of skills from inevitable downsizing has been identified as one of the biggest threats to the industry; and
Incentives to stimulate demand, akin to programmes that have been rolled out in Germany and the UK. These could take the form of scrapping allowances, tax incentives or temporary rebates for trade-ins to stimulate demand.

Bridging the private and private sector

The Turnaround Management Association - Southern Africa is intent on engaging with government bodies to promote closer cooperation between government and the private sector.

During November 2006 it had fruitful discussions with dti and National Treasury on a wide range of topics including turnaround industry driving forces and constraints, and how government can help.

Also, in 2007 and 2008 it made a submissions to the dti on draft business rescue legislation as now contained in Chapter 6 of the Companies Bill, 2008, and participated in workshops in this regard.

Presently, it is launching the Certified Turnaround Professional programme in South Africa under license from TMA, its parent body, and in partnership with Services SETA.