Loan-guarantee scheme is our best hope
The past quarter has set records in extra spending by governments measured as a share of (normal) GDP. For the developed world this emergency spending has ranged between an additional five percentage points to as much as 15% of GDP. Another record has been set in money created by central banks — of the order of an additional $5trillion. Included in the current bout of quantitative easing (QE) have been substantial purchases of corporate debt.
The monetisation of debt has meant very low interest rates with which to fund rapidly growing fiscal deficits, and rising debt-to-GDP ratios. Records are therefore also being set in the amount of cash raised by businesses. Since the end of
March, US-listed firms have raised a quarterly recordbeating $148bn of extra share capital. Monetary policy has made capital raising on a vast scale possible on increasingly favourable terms, without which recovery from the lockdowns would be impossible.
Loan-guarantee schemes, provided to commercial banks by central banks backed up by their treasuries, have been an important component of the financial relief. These are available on a large scale, though they are not expected to be fully required to offset defaults.
In normally fiscally conservative Germany, extra government spending on relief is about 15% of GDP, while the loan-guarantee provision is of the order of 30% of GDP. For the
US the stimulus plan is equivalent to 7% of GDP and the guarantees add another eight percentage points to the package.
It makes economic sense that ordinarily sound and profitable businesses in SA should not be forced out of the economy for an inability to service or roll over their debts for reasons entirely beyond their control. They should be able to start up again by recapitalising their operations given how much capital has been lost during the lockdowns.
The SA economy has not benefited from fiscal and monetary relief on anything like the scale offered elsewhere. The additional borrowing requirement of the government has surged to more than 14% of GDP, more than double the deficit planned in February, as we learnt from the finance minister on Wednesday. This is largely because tax revenues have declined so sharply, with further declines expected.
Despite a relative lack of encouragement of the kind offered in the US and elsewhere to the market for corporate debt, the capital market in SA has been active, with something of a flurry of capital raising by JSElisted companies.
The issue of relevance to shareholders (and the banks underwriting the issues) is whether the additional capital intended to be raised can pay for itself. That is, will it earn a return that will cover the (opportunity) cost of the capital raised? That is equivalent to the high long-term RSA bond yield of 8% plus an equity risk premium of four percentage points or more for the least risky of businesses.
If the answer is a positive one, a rights issue, or indeed any secondary issue to raise capital or debt, should go ahead. The hope must be that the market immediately share this justifiable optimism and reprice the company’s shares accordingly — for likely survival rather than extinction.
The same positive answer is required of any business, large or small, that needs to raise capital to resume business post-Covid-19. Will the essential extra capital raised cover its risk-adjusted costs? We must hope the SA financial markets, especially the banks, can help meet these calls for extra capital. The loan-guarantee scheme offered by the Reserve Bank is perhaps the best hope for business and economic rescue.
The government has the task of ensuring the capital market is up to this vital task of funding both the government and business on sensible terms. Without this the prospects of a post-Covid-19 recovery in SA, absent fiscal stimulation, are especially bleak. The burden of economic relief has passed to monetary policy.
Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.