International Ratings Agencies – why the fuss??

This question was asked of us the other day by a client who wanted to know why it seemed to be such a big deal and, if so, how it would impact on him and his medium-sized company. His view was that the ratings were only applicable at a macro-economic level and would have a negligible impact on him and his business. In the light of this we thought it would be of value to other business owners and directors to have some insight into the implications of the ratings agencies reviews and their impact on countries and business in general. Given the ethos of Lotus Management Group to provide practical, hands-on assistance to business we have also looked at what can be done by managements to improve their businesses in these tough times.

You will be aware that international ratings agencies Standard and Poors, Fitch, and Moody’s recently completed their reviews of SA and decided not to downgrade our status to what is commonly referred to as ‘junk’ ie this is the rating that indicates that a country’s economy is in a sorry state and that investors should exercise extreme caution in any financial dealings with that country. In SA’s case our ratings sit precariously close to ‘junk’ and there is a strong feeling amongst reputable economists that we will probably be downgraded to ‘junk’ in December this year.

It should be remembered that a country, just like any business, will at times have to borrow money to fund its various objectives such as infrastructure development, energy generation etc. So, here is why you as a business owner/manager/entrepreneur (lots of you are all three!) need to be aware of the impact of the probability of SA being classified as “junk’ at the end of this year. It is a clear signal to investors either to pull their money out and invest elsewhere or to apply the basic financial principle of risk and return and demand a higher interest rate to offset the risk of the SA Government not being able to repay its debt. (In business terms it’s like getting an unfavourable bank rating on a prospective/existing customer.) Therefore, the worse SA’s credit rating, the more it pays for its borrowings.

This in turn weakens the Rand, increases inflation and leads to higher borrowing costs for our commercial banks, who simply increase their borrowing costs to clients. All of this indicates that our economy would head to full-blown recession. As an analogy a ‘junk’ status in SA is like an individual being sequestrated or a company being put into provisional liquidation i.e. all interested parties are made aware that their financial affairs are unsatisfactory. In terms of sequestration it takes a number of years for the individual to apply for rehabilitation, whilst to avoid final liquidation and closure a company must be able to convince all stakeholders that it has a carefully considered and prudent plan to extricate itself from its financial problems. Finance Minister Pravin Gordhan’s recent meetings overseas with investors was an attempt to get them not to divest from SA and is a major reason why the ratings agencies avoided the ‘junk’ status. However, it is clear that unless the SA economy improves between now and December it will be extremely difficult to avoid the dreaded bottom status. It is thought that it usually takes a country approximately 7 years to recover from junk status.

So, where are we currently? In May the Reserve Bank kept the repo rate (the rate at which our commercial banks borrow from the Reserve Bank) at 7%, down rated their view on economic growth for 2016 to 0,6%, and saw inflation rising to 6,7%. It is hard to find many positives in SA at the moment, what with loss of life, riots and violence linked to the upcoming municipal elections, while corruption and maladministration appear to be increasing. There further seems to be little evidence of any political will to rectify the situation.

Government economic policy can at best be described as uncertain, despite our Finance Minister’s recent efforts to persuade offshore investors that SA does actually have a plan to rescue the economy. The statistics tell a depressing story with our GDP growth reducing from 4% in 2008 to a hopeful estimate for 2016 of 0,5%. An important statistic that impacts SA society in a harsh way is that the “official” unemployment statistics for the 1st quarter of 2016 are the worst ever recorded at 26,7%; it should be noted that most independent opinions view it as closing in on 40%. The implications of this are obvious and frightening, and worryingly there is no solution in sight as serious skills deficiencies are set to continue with education in the country fast approaching a crisis situation.

We could continue with the many challenges currently facing the country, but hey, you could be living in London under its perennially grey and drizzly sky! Let’s remember that any disordered situation will always present more opportunities than its ordered counterpart and move on to how to not only survive in an increasingly difficult and volatile business environment, but to identify and exploit the opportunities that are in fact out there.

The current situation means it’s time for you to reassess every aspect of your business. In other words, it is critical to review your business holistically, and to do so it is important that a framework is used to ensure that nothing is neglected or omitted. There are many such frameworks to use but it is important to make sure that its application will be practical (the last thing you want to end up with is a theoretical solution full of jargon that is the brainchild of an academically bright person with no practical business management experience whatsoever!) The review must encompass both the hard issues (e.g. structure) and well as the equally important soft factors such as prevailing management of the workforce. The outcome must be an action plan with clearly defined objectives, tasks, responsibilities, timing and measures, all of which have a direct link to the attainment of the goals of the business.

A last and critical task in these tough times is to determine whether your business still has a clearly defined competitive edge. A useful test here is to complete this sentence: “You must buy our product/service because ……….” Remember you only have one sentence!

To end off this session bear in mind that possibly the key critical success factor is to surround yourself with competent people who have the same principles and values that you have.

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