STEPHEN VAN COLLER: Stealing from SA’s future
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As companies around the world struggle with Covid-19, I can’t help but draw parallels between managing a company in crisis, and a country in crisis.
Strictly speaking, financial systems are a zero-sum game and so you have only a few levers to pull when faced with a crisis.
I read with interest that Sasol, for many years a stalwart of the economy (and the Industrial Development Corp’s balance sheet), made a R91bn loss for the year. This is larger than the International Monetary Fund’s loan to SA.
But it was not the size of the loss that was eye-catching, nor the fact that it effectively takes around R30bn from SA Revenue Service coffers, thus reducing SA’s ability to repay its growing debt. Rather, it was Sasol’s response to fixing the problem that was noteworthy.
It wasn’t dissimilar to how the new management at Tongaat and EOH (where I am CEO) looked to solve their inherited problems: through asset sales and partnerships to swiftly reduce debt to manageable levels. These were decisions not well received by all — EOH sold some of its software businesses, while Tongaat elected to sell its starch business.
However, the stark reality is that interest on debt doesn’t stop accumulating just because of a crisis. In fact, it usually gets worse as the rates at which you borrow tend to rise.
You only have to look at our government’s predicament. Not only have foreign and local borrowing spreads moved out considerably, the number of willing government bond buyers has dropped. This is why the Reserve Bank had to create liquidity in the bond market by buying back bonds.
The problem is that the more you borrow, the more interest you pay later. It’s like selling the future proceeds of a business by taking cash today and paying interest tomorrow.
I saw this first-hand. In 2017 and 2018, the banks lent EOH more than R3bn which was used for a number of things, including paying existing shareholders (some of whom were the previous management) dividends of around R600m. The grossly unfair consequence is that the current employees must work extra hard to repay the interest and debt back to the banks while not being able to reap their just rewards. It means the business is unable to properly invest in the future until the debt is normalised.
Through restructuring and asset sales, EOH has reduced its debt ...
Strictly speaking, financial systems are a zero-sum game and so you have only a few levers to pull when faced with a crisis.
I read with interest that Sasol, for many years a stalwart of the economy (and the Industrial Development Corp’s balance sheet), made a R91bn loss for the year. This is larger than the International Monetary Fund’s loan to SA.
But it was not the size of the loss that was eye-catching, nor the fact that it effectively takes around R30bn from SA Revenue Service coffers, thus reducing SA’s ability to repay its growing debt. Rather, it was Sasol’s response to fixing the problem that was noteworthy.
It wasn’t dissimilar to how the new management at Tongaat and EOH (where I am CEO) looked to solve their inherited problems: through asset sales and partnerships to swiftly reduce debt to manageable levels. These were decisions not well received by all — EOH sold some of its software businesses, while Tongaat elected to sell its starch business.
However, the stark reality is that interest on debt doesn’t stop accumulating just because of a crisis. In fact, it usually gets worse as the rates at which you borrow tend to rise.
You only have to look at our government’s predicament. Not only have foreign and local borrowing spreads moved out considerably, the number of willing government bond buyers has dropped. This is why the Reserve Bank had to create liquidity in the bond market by buying back bonds.
The problem is that the more you borrow, the more interest you pay later. It’s like selling the future proceeds of a business by taking cash today and paying interest tomorrow.
I saw this first-hand. In 2017 and 2018, the banks lent EOH more than R3bn which was used for a number of things, including paying existing shareholders (some of whom were the previous management) dividends of around R600m. The grossly unfair consequence is that the current employees must work extra hard to repay the interest and debt back to the banks while not being able to reap their just rewards. It means the business is unable to properly invest in the future until the debt is normalised.
Through restructuring and asset sales, EOH has reduced its debt ...