Covid-19: Life after lockdown will mean survival of the fattest

The coronavirus will lead to business failures, market consolidation and entrench incumbents with strong balance sheets. Should policymakers react?

South Africa’s state of national disaster has curtailed the free market and blurred the lines between business, government and society, raising the question of how their roles and responsibilities might shift in a new, post-pandemic social contract.

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University of Stellenbosch Business School (USB) visiting lecturer in corporate finance Brett Hamilton said it was clear that the Covid-19 pandemic would lead to business failures, with the SA Reserve Bank estimating an additional 1 600 business insolvencies this year, while the “fattest”, those with the strongest cash reserves, would likely survive.

“We find ourselves in one of the most uncertain periods of human history. It is blurring the lines between business, government and society. Policymakers are confronted with an unprecedented, and impossible, trade-off between public health and economic growth.

“Given the speed and uncertainty under which these complex decisions are made, we have seen unprecedented actions from governments, central banks and businesses. In many cases, governments have overstepped their usual political and ideological boundaries and business has somewhat embraced stakeholders over shareholders.

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“Fighting the spread of the coronavirus requires ‘big government’ and ‘business with a heart’ to work together. It may be expected and the right thing to do in a crisis, but the question is if these roles will remain after the pandemic,” he said.

Hamilton, a director at First River Capital, said cashflow was “the lifeblood of any organisation”, but lockdown had severely restricted businesses’ ability to generate cash through operations, while accessing cash through debt or equity investment were limited in the current economic climate, and possibly unwise.

The latest downgrade by Moody’s of South Africa’s credit rating to sub-investment grade severely restricts the country’s access to debt and has seen a spike in the cost of debt, he said, noting that the South African 10-year government bond yield reached a maximum of 12.36 per cent on March 24 compared with a low of 7.9 per cent in 2018.

“So debt may do more harm than good during these times, even with the debt-relief pledges made by banks,” he said.

This leaves alpha companies with large, mature and cash-flush, in prime position to weather the storm, buy out their competitors and continue to invest for growth after the pandemic, he said.

“Markets will become more concentrated and the position of incumbents more entrenched. The business world will look different after the pandemic and it will most likely fall on governments to regulate the new ‘alphas’ to ensure better competition. If it should do so and how it should be achieved remains to be seen,” he said.

He said the shifting of roles brought about by the pandemic raised the question of the role of companies in the market.

“During the pandemic, we have seen many companies shift to a more socialist stance, offering free products, expertise and financial aid to their employees and to other virus-related efforts. Is this perhaps the dawn of a new social contract?”

He said government intervention should also focus on the ability of the economy to recover after lockdown has lifted.

“What is required is the ability for companies to maintain payroll, gain access to debt financing and for central banks to provide the latitude for banks to reschedule loans (possibly with forbearance through credit guarantees). For this, governments must pull out all stops in terms of fiscal action,” Hamilton said.

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