Putting recession-proof plans in place

For the second time in two years South Africa, Africa’s second-largest economy, went into technical recession after recording two consecutive quarters of negative growth in the second quarter of 2018. This followed a similar situation in early 2017. Both recessions were short-lived, but business remains cautious.

In early December 2018 Statistics South Africa’s statistician-general, Risenga Maluleke, announced that GDP had climbed 2.2% for the third quarter on the back of a growth in manufacturing, lifting South Africa out of recession.

There are, however, still worrying signs for business. Household consumption is under pressure, according to Statistics South Africa. State-owned power generator Eskom instituted rolling power outages — or “load shedding” — in early December. Foreign direct investment projects in South Africa saw a 31% knock in 2017 (to its lowest level in a decade), according to EY. Input costs, such as fuel, are rising and putting industries like agriculture under pressure, according to agricultural body Grain SA.

Value-added tax increased by one percentage point in March 2018 and, ratings agency Fitch said, the country faces low growth potential, sizeable government debt, and the risk of rising social tensions due to high inequality.

Since 1975, South Africa’s Bureau for Economic Research and Rand Merchant Bank have complied a quarterly assessment of business confidence by tracking five sectors: manufacturing, building, retail, wholesale, and new vehicle dealers. The RMB/BER Business Confidence Index fell from 40 to 34, on a scale of 0–100, in the third quarter of 2018 and fell further to 31 in the final quarter of 2018.

But that doesn’t mean that companies were not caught off-guard by the recent recession, or the flagging economy, many having long had “recession-proof” plans in place. Here’s how some South African CFOs have prepared for the downturn.

Looking to the neighbours

While South Africa’s economy is in the doldrums, many countries across the continent still have healthy economies. For CFOs, demand for South African products in the rest of Africa presents an opportunity for market share expansion and can help to mitigate the impact of the downturn.

Some companies are already outward-facing and need to look for other ways to protect themselves. Christine Ramon, CFO of AngloGold Ashanti, noted that 90% of the global miner’s production and profit contribution comes from outside South Africa. “Hence the recession in South Africa impacts a small part of our portfolio. We are currently restructuring the business for sustainability in the short term. Through this process we are reducing costs and improving productivity so the business can be more resilient, despite exchange rate and commodity price volatility.”

Dion Mhlaba, CFO of RH Managers, a healthcare-focused private-equity company, also said the rest of Africa is firmly on the company’s radar to bolster margins: “Our business has been focused on the South Africa market all along, and now we are moving into the continent and will be more focused on a dollar-type return.”

But that might not be an effective strategy for long. Economist Thabi Leoka said stagnant South African growth is likely to have a consequential impact on the rest of the continent. She noted that further African expansion is also likely to be impacted by economic constraints in countries such as Nigeria and ongoing continental economic and political uncertainty in countries such as the Democratic Republic of the Congo and Zimbabwe.

Planning for the long term

In the short term, the threat of recession requires reassessing whether the company’s financial risk-mitigating measures are appropriate and sufficient, and taking corrective decisions where necessary.

Ramon pointed out that AngloGold’s finance function continues to focus on improving effectiveness and efficiencies across the business. Due to mining’s long-term nature, she said: “We need to continue to invest in brownfields projects and sustaining capital to extend the life of our reserves. We also prioritise the timely delivery of growth projects, whilst retaining the long-term optionality in our portfolio in order to improve the overall quality of our assets and provide flexibility. Capital prioritisation, based on prudent long-term assumptions, is important in optimising margins and improving free cash flows in our business.”

While planning long-term financial flows and projects to help weather recessions, there are pressing concerns that can’t be ignored. For RH Managers’ ongoing healthcare infrastructure projects, affordability is an issue. “We’re sitting with projects of around ZAR 2.5 billion [$175 million], and that affects our equipment price,” Mhlaba said. “Before, you could negotiate with equipment suppliers and get a locked-in rate, where you do a forward currency exchange, but now it’s more difficult … so you might just take your chances with the spot rate. But then you have a project you can’t price properly.”

Despite the challenges, Mhlaba doesn’t see a shift in focus. “We have considered the economy, and we see so much potential in South Africa. It just might be slow progress.”

Due diligence

While South Africa lifted out of its 2018 recession within months, other strategic risks remain on the horizon. There are concerns around the downturn worsening and further impacting consumer behaviour. Another worry, which has been widely reported in the South African press, is the risk of a downgrade to South Africa’s sovereign rating, although in mid-September ratings agency Moody’s indicated that a commitment to fiscal consolidation could keep the axe from falling.

While being mindful of strategic risks and the current environment, it is important for business to work on improving investor confidence.

From AngloGold’s perspective, Ramon pointed out issues around political and regulatory uncertainty; the need for a resilient balance sheet to navigate inflationary pressures, commodity prices, and currency volatility; concerns around skills; and the drive for improved digital effectiveness, data analytics, and cybersecurity.

— Cara Bouwer is a freelance writer based in South Africa. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.