The government should take a more active role in the Covid-hit economy
The Reserve Bank ought to step in to rescue those South African companies deemed too big to fail — and there might even be a BEE dividend in it
● Extraordinary times require extraordinary actions. These were the words of Christine Lagarde, the president of the European Central Bank (ECB) a month ago when the bank took a major decision to embark on a new wave of bond purchases meant to counter severe risks to the eurozone as a result of Covid-19.
The ECB announced that it will buy up to à750bn (R15-trillion) in government and corporate bonds and other assets, to inject much-needed cash into the financial markets and shore up the real economy.
Financial markets and companies across the world are coming under severe pressure, and corporate failures are inevitable in this climate. Governments are undertaking extraordinary measures to minimise both the death of people and the collapse of economies. If governments fail to act swiftly and in a big way, the real economy will, in all likelihood, be the channel for financial, social and even political instability.
As governments take actions to address the immediate health challenges, central banks have drawn on their toolboxes to keep the financial system resilient and to allow banks to increase their lending capacity so that businesses and households are cushioned.
Like other global central banks, the South African Reserve Bank (SARB) has swiftly responded and cut interest rates by a cumulative 225 basis points year to date and released about R550bn worth of liquidity through the reduction of regulatory requirements for the banking sector. This is exactly what a central bank is supposed to do in times of crisis.
But the SARB can do more, should financial or credit markets malfunction in a way that stops the flow of liquidity to companies and individuals, where it is most needed. The SARB can take, within its current legal framework, an even bolder step, to play an activist role if systemically important companies collapse.
There is a sense already that some blue-chip firms in SA could be facing significant liquidity challenges. Examples include Edcon and Sasol. There are more — some of which were in a bad shape long before the onset of Covid-19 — that have signalled that they will cut either their staff complement or salaries. Their collapse could spell trouble for households and businesses they have supplier relationships with.
No-one is certain about the duration and severity of the crisis. If the impact on the real economy is devastating, it could threaten financial stability. Many companies that are systemically important and deeply interlocked with various other sectors of the economy, including small and medium enterprises, might soon collapse.
Constructing new economic foundations will be costlier than acting to prevent collapse.
As was the case during the Great Depression, the political pendulum will likely shift to populist nationalism, with a yearning for charismatic leaders who promise quick fixes. Along with economic structures, the existing unstable social equilibrium and the political arrangement may wither away. The resurgence of right-wing politics in the US and Europe happened on the back of the global financial crisis.
An economic depression in our time caused by a rupture in the real economy could ignite a fire in the financial system, creating similar financial instability effects to those we saw in advanced industrial economies in the wake of the 2008 crisis.
Since SA did not have a banking crisis in 2008 to learn from, what policy tools should the government explore to avert a real-economy crisis?
There is a compelling rationale that the government, through the National Treasury, the Reserve Bank and development finance institutions, should intervene to rescue systemically important companies when the time calls for it.
Failure to intervene could worsen the already battered state of the economy, increase the possibility for financial instability, and risk social instability that might be very hard to reverse. This would be on top of the very high social and economic costs that households are sustaining.
To fail to act boldly in extraordinary times is to court the curse of economic depression, unemployment and social instability on a large scale.
During the global financial crisis of 2008, many US industrial sectors, especially the auto sector, were on their knees until bailed out by the government.
Bailing out major companies is not uncharted terrain for SA. The government, through the Reserve Bank, bailed out African Bank and took a 50% stake.
In the case of large corporations, the government can purchase corporate bonds in the secondary market, with half of the bonds made convertible to shareholding to allow the government to share in the upside.
Various other conditions could be introduced to allow for corporate restructuring or to achieve a legitimate social purpose in the form of meeting transformation targets at board and management levels, something many JSE-listed companies lack.
For every bailout, companies should be expected to reciprocate. Such reciprocity could be written into the terms of bailouts.
A government exit mechanism would also need to be built into the bailout process, with the resale of shares aimed at diversifying the capital ownership structure of JSE-listed firms.
Such a bailout facility should only be made available to those companies that are deemed to be systemically important, and whose collapse could create a deadly domino effect on the financial sector and the whole economy.
Given that this crisis will likely result in corporate defaults with potential financial stability consequences, the Reserve Bank, working with the National Treasury and development finance institutions, should play an active role. Such an activist role is appropriate in the era of radical uncertainty we are in.
Acting boldly in exceptional circumstances would also place the Reserve Bank in a much stronger position to defend its operational independence in normal times. This would allow the Bank to stave off dangerous calls for it to act recklessly when circumstances do not demand it.