In conversation with Mike Brown

By Nedgroup Investments

What are you focusing on getting right in this crisis?

I’m focusing on getting the right balance between big picture things, detail and communication. I’m also making sure that we provide a sense of direction and purpose for our clients, staff and communities through extensive communication.

In a crisis like this, business continuity planning is essential. We set up pandemic steercos to provide short-term direction on how we operate in this crisis environment. I’m trying to get everyone’s minds and thoughts organised around resilience in the short term, a phase of transition through the levels back to a more normal environment in the medium term and thereafter, not losing sight of the longer-term future, the reimagine phase – life after the crisis. We’re using this environment as an opportunity to deliver on Nedbank’s purpose – to use our financial expertise to do good - in supporting our clients and communities. Stakeholder and shareholder engagement, and communication, is absolutely vital in these times as well as very regular communication with our staff and clients.

Helping clients through the crisis

Many of our clients’ financial position has been impacted through no fault of their own. Our focus is to help them manage through this period via extensive campaigns and restructuring and helping them manage their cash flow in these difficult times - to date, we’ve helped more than 200 000 clients. Together with the SA Future Trust, approximately R150 million has been dispersed by Nedbank to almost 2 000 clients. We’ve also been very involved with National Treasury and the South African Reserve Bank (SARB) in designing the R200 billion SME scheme, the first R100 billion of which was announced yesterday.

Bank leadership in the crisis

The Banking Association of South Africa (BASA) has been focused on staying ahead of the curve in emerging issues for both the economy and our industry. It has sent recommendations to National Treasury and the SARB around changes in repo mechanisms, the release of Directive 3 around structured accounts, capital relief across the banking system, liquidity coverage, etc. BASA has weekly meetings with National Treasury and the SARB to keep up to date with what is happening as well as what appropriate interventions could be. Business Unity South Africa (BUSA) set up a platform called Business for South Africa, which has become the de facto platform for business to engage with government on Covid-19 related matters. We’ve been very active on that platform on all emerging regulations and have provided input on what’s working and what’s not.

How are banks positioned to manage the crisis?

Banks globally are in better shape now than they were in the GFC. South African banks went into this crisis with capital levels 40% higher than for the GFC and a lot less exuberance in asset growth in the build-up. While no one knows the shape and depth of this crisis, the GFC was a financial crisis, which then hit the real economy had the banks at the epicentre. In the Covid-19 crisis, banks are more impacted by the economic outcomes of the crisis and part of the solution is to help clients manage their way through it. In South Africa, a big positive of exchange controls is that the total Rand funding pool across the banking system is stable and controlled through exchange controls. The SARB, through the repo mechanism, is able to ensure that pool is distributed into the financial system.

SA lockdown and the return to normal

The base case that we’ve used in some of our economic forecasts was 35 days in level 5, potentially 30 days in level 4, 60 days at level 3 with level 2 sometime in August and September - but there is lots of forecast risk in that. We may even get to different levels by region. There’s also a lot of feedback trying to change what can be done under each level relative to what is currently allowed.

The balancing act - Mike’s advice to the President

It’s an incredibly difficult balancing act between the impact of the virus on health and mortality and the impact of the virus on the economy, health, society and mortality. The key is how to safely accelerate through these levels. I would advocate re-looking the approach to levels. An approach, which is so rigid by sector, by product and by sub-product can’t succeed. It ignores the interlinkages in the economy and is almost impossible to administer and understand. I would advocate that all businesses that can adhere to health, social distancing and safety standards should be allowed to open and then have a shorter list of what is not allowed in each level. We also need more communication from the President on a weekly basis to give us hope about what the future is likely to look like.

Some longer-term consequences

Growth: The longer the lockdown, the more exponential the long-lasting damage to the economy. We expect growth in 2020 to be extremely negative, between -7 and -11 with some kind of bounce back in 2021. Inflation: In this environment it keeps falling with low demand and very little pricing power. Our latest economic forecasts predict inflation averaging less than 3% for the full year and just below 2% at some low points during the year. Tax: With unprecedented fiscal stimulus and fiscal deficit and extremely high levels of debt to GDP, taxes, either directly or indirectly, are likely to increase over time to the point where any increase will be counterproductive in terms of the overall generation of tax revenue.

Acceleration of some business trends

The trend around the importance of sustainability and purpose for any business will continue to accelerate both from a client and society perspective as well as an investor point of view. Digital will continue to escalate as will building more agile organisations. Off the back of digital is always a focus on customer experience, costs and data. While there will be an increase in remote working, for many, interacting with others will still be important.

Advice for business owners and entrepreneurs

This is an environment to focus on cash, cut all excess spending and stay extremely close to your customer. Communicate with your staff, bankers and potential financiers. Understand the available relief schemes, such as payment holidays from banks, relief schemes for staff, the SME Scheme, etc.

Advice to business leaders in uncertain times

Communication is more important now than ever. Understand what needs to be delegated and be able to trust your teams. Continue to provide motivation and support and lead the team to perform better than the sum of the individuals. Get into a routine around working from home. Be disciplined regarding working hours and exercise. Reflect on some of the privileges we have and enjoy the benefits of being in lockdown with family.

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