Tony van Niekerk of COVER magazine recently interviewed Charles Nortje of Credit Guarantee as part of the Professional Specialist Commentator series.
*Please note this interview was conducted on 28 February 2017.
With the South African economy being under pressure Charles was asked what effect this has had on Trade Credit.
Q: The SA economy has been under pressure for a while, what does this mean for the trade credit environment?
A: I think it’s had an unprecedented effect. I think you have to go back to the year 2008 where we had the financial crisis, to find a year like 2016. It was pretty tough and a lot of market sectors will say it was difficult.
We have experienced several years of slow economic growth, and this has a corrosive effect on companies. They start to run low on the resilience they previously had. We found this becomes very problematic particularly with indebted parts of corporate South Africa, where the businesses are carrying a lot of debt. It’s difficult to put one’s finger on any particular sector as opposed to 2013 and 2014 where it was more predominantly the steel and construction sectors that were most affected. Now, we see this corrosive effect of years of low growth across the board.
Q: How do you as CGIC respond to this and manage this period?
A: Very carefully! It’s tricky, the environment remains very competitive. We have to be cognisant of market forces yet price adequately for risk, which is a difficult balancing act.
Fortunately, we have a good team of professionals whose job it is to collect information from the public domain, banks, credit bureaus and our databases on overseas buyers, including customers of our policy buyers.
We monitor the information and look at our adverse trends. This is where we look at insolvency, business rescue and payment delays coming through the system. It serves as an early warning or trigger and we respond accordingly and manage the risk.
We may need to take steps to trim our exposure in certain areas as this information comes through. But we are in the risk-taking business. We don’t run away from risk, we embrace it. We don’t want to let our policy holders down and withdraw cover. We’ve gotten used to managing through a fairly adverse economic climate in the past four years.
The trickier one to manage has been Africa where the macros particularly in West Africa haven’t been great. We saw sudden reversals in the economy – like Nigeria from oil, metal price and the economy running out of dollars and fuel – happening quickly in a perfect storm.
Q: It seems like there will be a slow uptake in our local economy. How long do you think it will take to filter through into a positive credit environment?
A: There are signs in a slight uptake. One swallow doesn’t make a summer though. The rand/dollar has recovered nicely, there is an uptake in commodity pricing, the rating agency seems to like the Minister’s budget from February so there are some things that seem to be working.
It can take about 18 months for these things to filter through. This is because businesses need to move from a phase where they’ve had, for example, production capacity that has been mothballed and they need to turn maintenance expenditure into production expenditure. It depends on the industry. Retail for example, is much quicker to respond to economic conditions than the construction industry which takes much longer to turn around.
Q: I suppose it also means you need to change people’s mindsets, so as not to manage the budget so tightly, but look at an expansionary environment in the private sectors.
A: Our policy holders would like to see confirmation of this trend before they act. So, some of the investments have been delayed as companies are wary about the economic climate. I think over the next six months it will be a wait and see game.
There’s also a few things happening in the world. We also have new leadership in America, Brexit in the UK, elections in France & Germany will happen later and people would like to see the world economy and how that develops over the next six months to a year before they make big wholehearted commitments.
Hopefully 2017 will be a better year as 2016 was certainly tough going.
Watch the video here.
Credit Guarantee can help your company manage risk in these turbulent times. Simply follow this link to find out how credit insurance works.
