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Toward Better Practices in Systematic Corporate Restructuring – Southern Africa

By Tiaan Herbst, Marketing Director at TMA-SA

Recent systemic crises [COVID-19, State Capture, VBS Bank] have underlined how widespread, severe weaknesses in South Africa’s corporate finance and governance, combined with inappropriate macro-economic policies or a sudden loss of confidence, can have unforeseen and extremely serious consequences for the economic and social fabric of our country.

Paul Romer, the Stanford economist, remarked: “A crisis is a terrible thing to waste (Manzo, 2010).” Those are profound words and resonate true for at least three reasons. First and most obviously, a crisis is a terrible and costly event. Given the wide-ranging impact of the COVID-19 crisis on financial markets, commercial banks and economic activity, the South African Reserve Bank, like many central banks, used the full arsenal of its tools to respond to the crisis. It was characterised by a simultaneous and swift implementation of policies consistent with its mandates of price and financial stability whilst recognising its responsibility for prudential regulation of the banking and insurance sector. It came at a cost though. Severe challenges require action: the overcoming of the socio-economic consequences of COVID-19, and the need to combat rising debt and debt-servicing costs. The crisis-induced decline in GDP has been as great as 16 per cent of GDP between the first and second quarters of 2020, resulting in an annualised growth rate of -51% in 2020 (Statssa, 2021). South Africa’s mere fourth-quarter growth in GDP of 1,4% in 2021 (Statssa, 2021) is insufficient to declare success – it highlights a hard-to-quantify intangible cost which includes slow growth and lower long-term productivity.    

Second, crises may make it possible to force through necessary but politically difficult changes in law, policies, and institutions. The proposed amendments to the companies act appear to lack what practice requires to promote a debtor-friendly restructuring regime. And local election manifestos address self-centred wants instead of socio-economic needs to overcome current macro and micro-economic challenges. The value lies in actioning much needed and overdue change.

And, finally, crises underlined the gaps in our ability to deal with corporate distress. Crises can teach us what works and what doesn’t, although we need to continue searching for additional practical solutions that were not tried during previous financial crisis. Self-regulatory bodies, such as the TMA and its members, will play larger roles to distil the lessons from practice and academia to offer a range of suggestions (some might even be controversial), on measures to help prevent crises and manage recovery through turnaround management science.

 

 

 

 

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