Business & Economy

Tuesday, 05 May 2009 13:21

No safety nets as corporate risk increases on the back of soaring company debt

{pp}Developing countries could face a financing gap of $270-billion to $700-billion this year as trade income dwindles and rich nations vie for capital the World Bank said in a paper produced for the meeting of G20 nations in London in April.

South Africa could be hard hit as it sees a slump in commodities demand and as it pays for high infrastructure costs for the 2010 World Cup and the arms deal. Although judgements and summonses for civil debt are dropping in South Africa, corporate debt is on a sharp upward spike with increasing layoffs and shutdowns.

The World Bank estimates well over $1-trillion in emerging market corporate debt and $2-trillion to $3-trillion in total emerging market debt will mature in 2009, the majority of which reflects claims of major global banks extended cross-border or through affiliates and branches in emerging markets. According to Standard and Poor's, between January and late February 2009, there were 32 corporate defaults affecting $49bn in debt. During 2008, 125 companies defaulted on $429bn in debt. Moody's put the 2009 default rate on speculative-grade paper at 5,2%.

“Risk Management has never been more important,” Liza van Wyk, CEO of major management training organisation, AstroTech says. “We are seeing increasing numbers of companies requesting our Risk Management course as they try to avoid becoming part of the global statistics of crisis and crash.” She said that one of the most complex roles that had come under massive pressure was that of the Chief Financial Officer in companies. “In the past they were grey backroom people, who kept the papers in order for board meetings, tracked an organisation’s process and liaised between committees and auditors, but today with finances in such crisis their role has come under new pressure. In instances they were instrumental in causing the problems we see now, for example, the negative role they played at Enron and others so this role is perhaps the one, in most organisations, under the most pressure to dramatically reform.”

A new survey by Ernst & Young shows that globally CFO’s are struggling to meet the demands they face according to a survey of 251 of the world’s most powerful businesspeople: 97% say that CFOs’ roles have grown broader and nearly one-third believe that CFOs do not have enough understanding of the wider issues their businesses face. Eighty eight percent say that ‘being good with numbers’ is no longer enough. Ernst & Young said: “CFOs are being pulled in all directions and ultimately this is not sustainable. They are being asked to be business partners to their CEOs and commentators to their boards, as well as their more traditional roles as score-keepers of financial performance and custodians of risk management. Many Chief Financial Officers and Heads of Internal Audit believe that certain internal controls are still ineffective, with the biggest ‘blind spots’ being controls over expansion into international markets, post-acquisition integration and real estate and construction projects.”

“In South Africa,” Van Wyk said, “we are seeing increasing signs of strain in major organisations as funding challenges bite and the role of CFO’s come under pressure; the crisis facing SAA and the downgrading of the investor rating of Transnet, are but two such examples. For companies to survive this deepening crisis, and all indicators are that we are only at the beginning of it, Risk Management needs to be integral to day to day business management. “Given the range of new challenges even experienced business leaders and CFO’s need to get a fast refresher course on the key aspects they have to investigate to effectively ensure Risk Management helps grow the business.” Concerns are also mounting as to how emerging markets will be able to rollover maturing debt, particularly for banks and large corporations. It estimated that in 2009, 104 of 129 developing countries will have current account surpluses smaller than private debt coming due. For these countries, total financing needs were expected to amount to more than $1,4-trillion during the year. External financing needs are expected to exceed private sources of financing (equity flows and private debt disbursements) in 98 of the 104 countries, implying a financing gap -- not taking into account flows from official sources -- in those 98 countries of about $268-billion.

“Conventional wisdom used to be that the biggest risk was not taking a risk, but in financially perilous times, the biggest risk may be taking a risk. Every step has to be carefully weighed and measured against corporate criteria, the time for a finger in the wind to test which way things might go is past. Now knowledgeable management decisions have to inform every step and you can’t get that without ongoing learning,” Van Wyk said.

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