OUR VIEW ON THE CREDIT CRISIS …AND WHAT SHOULD YOU DO?
The credit crisis started in the US mortgage market mid last year and has now impacted the global (primarily Northern Hemisphere) financial sector. Bad debts arising are now being estimated at US$1 trillion (that’s $1,000,000,000,000) If you allocate that over 5% of the world population (assuming that is the number of net investors) that adds to about $4000 per person, not a huge amount, but still significant especially if the losses are more concentrated on fewer people. The real loss will come in the form of capital losses in asset values (mainly property related) and business trading losses as consumer spending stalls.
New Zealand is a net borrower so we are being affected. The failure of property based lending institutions like Lombard, and closure of property linked managed funds is directly attributed to the global credit crunch. It is likely there will be more failures to come. Investors in those sectors have lost confidence and want their money out. New Zealand trading banks may also be affected. They are offshore borrowers, apparently between 30% and 40 % of the Australian owned trading banks money is raised on the international market. Right at the moment trading banks are saying that they have money to spare, partly because local investors consider they are still safe. This may change, especially if investors lose confidence…ANZ doubling their bad debt provision to over NZ$1 billion is not the type of news investors like to hear.
The worst that could happen is a total meltdown of the financial sector, to the extent that the only place investors will put their money is into government guaranteed investments. If that happens, the governments will effectively become the banker and they will have to fund the banks. In a way this has already happened in the UK with the government funding Northern Rock and in the USA with the government funding Bear Stearns. Whilst intervention keeps the wheels of finance turning, such a meltdown would still lead to enormous losses to investors.
Will the worst happen? Well that depends on how effective interventions are. It appears that the problem has been well recognised and that government bankers are willing to react when they see a major failure looming. Our own Reserve Bank Governor is calling for calm and for people to maintain confidence. It may be that time will dampen down the fear and investors will settle down. However at the moment it appears still to be worsening.
WHAT SHOULD BUSINESS’S DO?
Even under the best outcomes there is going to be financial hardship in the business sector. When people stop consuming and instead focus on paying off debt, demand for goods and services (especially non-essentials) fall. So any business involved in selling or servicing the non-essentials sector will suffer a drop in turnover ( i.e. when consumers ask “do I really need to buy that or do that?” and say “no”, it’s a non-essential)
If your business is in the non-essentials sector then our advice is:
- Re-budget your business based on turnover falling 20%, 30% and 40%. This will highlight the extent that you need to restructure to maintain a bottom line profit. When you know what has to be done, and the signs of turnover reduction start showing (many are already experiencing it) don’t delay, do what has to be done.
- Start with trying to establish “what is the worst that could happen and how would we deal with it?” Then work upwards from there so you understand where you might be under each scenario.
- Don’t make the mistake of increasing your advertising expenditure hoping to find new business. It will most likely be too little too late and you will just be doing what everyone does. Far better to concentrate on other means of building loyalty with existing customers.
- Look for another business to merge with. This may be a merger of equals or a take-over. Either way, if means survival of both business it is better than failure. There are a lot of issues to overcome but many strong businesses grew out of merging and surviving a recession.
- Look at your product line up and if possible eliminate non-essentials, and increase input into selling essentials. Reduce stock of non-essentials and put less effort into selling them.
- Beat up your suppliers for a better deal. Especially those supplying imported product, many have not passed on the gains they have made from the higher NZ$.
- Sell surplus assets. The time to try and do this is now. Use the funds to repay your overdraft or other debt.
- Cash up investments and put the money into the business. Use it to repay your overdraft or other debt.
- Look at delaying new projects that require further funding. If you are trying to make a loser a winner, stop now.
- Talk to your banker about restructuring your debt. Try to increase the term of your borrowing to avoid repayment demands. Minimizing the short-term interest rate is less important than ensuring you have the credit you need.
- Demand more productivity from your employees. Make non-performers redundant. Unemployment will rise so the power will shift back to the employer who in many cases has become too soft.
- Be ruthless on credit control. Avoid sharing someone else’s losses, especially with those who have failed to take the hard decisions that you have taken.
- Talk to you advisors. They are talking to other people just like you, they understand and will have valuable suggestions. They will also be impartial and not emotionally involved.
- Take extra care of your personal health and fitness. You need to be stronger and therefore better able to deal with worry. Also, look after your family relationships.
Most of all, we do not want to be purveyors of doom. Hopefully we will have a soft landing. New Zealand (especially the Bay of Plenty) is a good place to be when times are tough. The world market for our “soft commodities” is very strong. Immigration will likely turn positive again. We may even get a right-leaning government, lower taxes and lower interest rates? However, if this message has made you uneasy, then do something about it, now!
BUSINESS TIP
"On observing an approaching squall a good sailor readies his craft well before the encounter."
