Economic green shoots - How SA companies could nurture growth

The second quarter of 2009 has given many organisations some hope. The first signs of life beginning to show in commodity and equity markets with the firm recovery of the US stock market, and the price of oil increasing to previous profitable levels. It would appear that the markets are beginning to show a small recovery.

Coface’s new growth forecasts, taking into account a world GDP growth contraction of 6,6 points between 2007 and 2009, project a GDP contraction of -2.5% in 2009 and a recovery in 2010 of 1,7% positive GDP growth.

After downgrading the credit ratings of 22 countries in January and 47 in April, Coface is now downgrading 13 country ratings, primarily for small or medium-size economies highly dependent on international trade.

Perceptible signs of the end of the recession and the scenario of a weak and slow “L-shaped” recovery remain the most likely.

Industrialised countries will see negative GDP growth of -3,9% in 2009 while emerging countries will show positive growth of +0,7%, coupled with positive but weak growth of 1,7% in 2010.
The expected recovery in 2010 is weak for industrialised countries at 0,5% GDP growth, but better for emerging countries at 4,1%.

With an expected South African GDP growth rate of 0% in 2009, meaning no further contraction of the economy, and projected 3% growth in 2010, the country among other things will need credit funding to facilitate this economic upturn.

The global financial crisis has been attributed in part to greed, poor controls and the overextension of credit to both individuals and corporate credit consumers. Moving forward it is critical that lessons from the bubble burst are used to strategise for growth and recovery going forward.

Financial institutions have born the brunt of the scrutiny around the extension of credit to individuals and companies. Financial institutions are however one section of the market when it comes to credit extension.

Most organisations have some sort of payment extension program for their buyers. Whether the terms are 30 to 180 days before payment is received, it is in essence credit extension as payment for goods is made after delivery.

Whilst a lot has been said on how credit extension has damaged the market, the question now is how credit extension can help rehabilitate the market. Prudent credit extension between organisations will be one of the major driving factors in rebuilding both international and local industries going forward. Going forward it is imperative that organisations have absolute assurance of the ability of the buyer to pay for goods delivered.

Quality and relevant information as to the operations of the buyer’s business, the management of the business and financial stability are critical factors to consider when reviewing business relationships.

Prudent credit management will become one of the most valuable asset in any organisation. The ability of an organisation to react quickly to market information on particular buyers or buyers’ industries will give organisations the flexibility to protect themselves from risk and seize opportunities when they present themselves.

Intercompany credit extension will be one of the major elements to facilitate the spark for growth. The rehabilitation of the economy is in part dependent on cash availability through responsible well-controlled credit provision