Turnaround market watch South Africa

The South African private sector turnaround market has been relatively after the busy days of the late nineties.  However, signs are pointing to a moderating economy and more work for the turnaround industry.

Robust economy - but moderating?

South Africa has been experiencing unprecedented growth, with interest rates the lowest in 24 years until starting to increase in June 2006. 

However, business confidence is moderating, as evidenced by trends in both the SACOB Business Confidence Index and the RMB/BER Business Confidence Index.

SACOB Business Confidence Index

 

 

(Click on the thumbnail for the enlarged SACCI Business Confidence Index graph).

 

 

SACCI’s Business Confidence Index (BCI) decreased to 96,9 in October 2007.

Since June 2004, this is the lowest level for the BCI and a new low for 2007.  It appears that after the BCI has been resisting a general decline in business confidence, the magnitude of the October drop suggests that corrections may be more pronounced.

Of the thirteen sub-indices that make up the BCI, eight influenced the BCI positively during October 2007 whilst five negatively affected the BCI.

SACCI Business Confidence Index sub-indices October 2007 versus September 2007:

• Positive: Manufacturing, retail sales, share prices, precious metals prices, Rand exchange rate.
• Neutral: None.
• Negative: Liquidations, exports, imports, vehicle sales, construction - buildings, inflation, private sector borrowing, real financing cost.

RMB/BER Business Confidence Index

The RMB/BER business confidence index (BCI) dropped by one index point – from 81 in the first quarter to 80 in second.

 

 

(Click on the thumbnail for the enlarged RMB/BER Business Confidence Index graph).

 

 

The RMB/BER Business Confidence Index (BCI) fell by 8 points to 72 from the second to the third quarter of this year. Although still high in a historical context (the 10-year average is 55), the index is now at its lowest level in three-and-a-half years.

This signals that growth in SA’s economy is set to slow further in the coming months.   Manufacturing output also cast a cloud over the outlook.  Official data showed the economy’s second-biggest sector grew a sluggish 3,1% in the year to July — backing the case for interest rates to stay on hold, despite rising inflation.

“The SA economy is still growing, but at a slower pace than in the past couple of years,” said Citigroup economist Jean Francois Mercier. “The outlook for the next monetary policy meeting in October remains unclear, but with confidence falling more than what we expected in the third quarter, we are retaining for now our call for no further rate hike.”

The Reserve Bank has lifted its key repo rate by a cumulative three percentage points since June last year to quash inflation, which has breached its 3%-6% target range for four months in a row.  It takes up to two years for changes in interest rates to make themselves felt and many analysts think the Bank should pause to assess evidence that consumer demand for goods and credit is subsiding, while investment takes over as the main growth engine of growth.

The business confidence index compiled by the Bureau for Economic Research (BER) added to those concerns, falling by eight points to 72 in the third quarter of this year — its lowest since early in 2004.  It was the fourth fall in a row for the quarterly index, which was compiled after the past two interest rate hikes in June and August.  It also took into account the turmoil in global financial markets last month.

“The sharp fall may paint an overly pessimistic picture of the South African economy, but ... we cannot ignore its message,” the BER said in a joint statement with sponsors Rand Merchant Bank (RMB). “The third quarter fall in the index foreshadows a further economic slowdown in the second half of the year,” it said.

SA’s economy grew by an average annual pace of 5% over each of the past three years, but the momentum slowed to 4,5% in the second quarter of this year, suggesting that expansion may fall short of an expected 4,8% increase over the full year. “It is another piece of evidence, but we think that when they are all thrown in the pot, the Bank will still probably raise rates,” said RMB chief economist Rudolf Gouws. “But it will be a pretty close call,” he added.

All components of the index fell in the third quarter. The largest dips were among new vehicle dealers and manufacturers, which both fell by 13 points.  Retail, wholesale and building confidence dropped slightly. The RMB/BER statement said that although its index was set to ease further in coming quarters, it was unlikely to dip below 50 — which would signal a real economic downturn.  Solid global growth and a weaker rand, along with a sharp pickup in public and private investment, would boost employment and income over the next few years, keeping the economy on the boil, it said. But the manufacturing figures from Stats SA were less comforting.  Growth quickened modestly from an annual pace of 1,9% in June and output rose 1,2%.

Last month the Investec purchasing managers’ index — normally a reliable barometer of manufacturing activity — slumped to a 16-month low.

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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.

Parastatals undergoing turnaround action are Transnet (Maria Ramos), South African Airways (Khaya Ngqula) and Denel (Shaun Liebenberg). 

The 2004 Babani turnaround programme at SAA has failed, and is being replaced by a second turnaround programme devised by US-based airline management and consultancy firm Seabury Airline Planning Group.

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.

Turnaround and transformation programmes are being run at the South African Revenue Services (Pravin Govender). 

At the Department of Home Affairs, a second turnaround programme has been announced in April 2007, with Mvuso Msimang, who did the SITA turnaround, moving 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 Business" reported a big rise in companies facing serious financial difficulties July 16 2006

Opinion of Standard & Poor

More companies are hitting financial difficulties than at any time since 2003, according to data from ratings agency Standard & Poor’s (S&P).

The figures indicate that the global credit boom is coming to an end.

S&P’s Global Potential Fallen Angel survey, one of the key indicators of corporate financial health, reported on Friday that 25 companies gained a speculative rating in the month to July 11, putting $34bn (E26.9bn, £18.5bn) worth of debt at risk.

A speculative rating downgrades their debt to junk status.

This is the first time the companies falling to speculative grade has outnumbered those climbing to investment grade for two years.

The figures explains recent moves by Goldman Sachs and Ernst & Young, among other leading institutions, to bolster their teams specialising in restructuring companies.

The report comes the same week that the Bank of England’s Financial Stability Report gave a stark warning that London’s institutions were taking too much risk and were exposed to a financial downturn.

The Bank warned: “In the event of a sharp fall in asset prices, some of the underlying vulnerabilities in the balance sheets of corporates, households and, ultimately, financial institutions could be exposed.”

The low interest rates of the past two years have left markets awash with credit, protecting failing companies and fuelling a wave of corporate takeovers.

Opinion of Edward Altman (Z-Score inventor)

Edward Altman, a finance professor at New York University who specialises in predicting defaults, told The Business: “The structure of credit markets has changed and non-traditional lenders such as hedge funds and private equity have kept the default rate down.  Will it continue?  I believe things will change, and change soon.”