OPINION: DFIs missing in action amidst Covid-19 battle
JOHANNESBURG - The role and impact of South Africa development finance institution (DFI’S) has somewhat been muted in the fight against the pandemic.
In the recent webinar convened by the South African United Business Confederation (Saubc ) to discuss the R300 billion guarantee scheme established by Treasury and the SA Reserve Bank with the participation of major commercial banks in the country, the DFI’s, in this case the Industrial Development Corporation (IDC), were conspicuous by their absence.
TAs the focus of Covid 19 shifts towards rebuilding and recovery, the key question is what is the role of the DFI’s in this national effort. he DFI’s are supposed to be bulwark against economic down turn situations.
Traditionally the DFI are renowned for their countercyclical and catalytic capabilities to create development impact.
With the advent of Covid-19, there is the expectation that the DFI's sustain and preserve this development impact. In other words, the DFI’s should build resilience in both their investment and assets.
This means keeping the investee companies afloat and retaining employment and employees. This is what the guarantee scheme by the South African Reserve Bank is ultimately intended to achieve.
It has to be conceded that this economic crisis is a crisis like no other, due to the depth of the recession and the severity of the demand and supply shocks. However, the international financial institutions and the multilateral development banks, including the International Finance Corporation, have already put in their skin in the game in countries where they are operational.
Other bilateral and other regional DFI like the the Dutch FMO, the UK-based CDC and the newest entrant, the US-based DFC, have all stepped up to the plate.
These DFI”s have put their balance sheet to good use. These have taken a variety of instruments ranging from liquidity financing, loan restructuring, local currency lending and guarantee schemes.
More importantly, they have in some cases prioritised medical health care and support for the small medium enterprises.
These DFI’s have operations in many countries outside their home countries and have relatively bigger balance sheets.
The comparison with the South African counterparts may, therefore, be a bit unfair.
The key question and expectations, however, remain the same.
The role of DFI’s should and must be to the preserve and sustain the development impact.
In South Africa, the role of DFI’s, during this pandemic have hardly been visible or discernible. If anything, they have been in the public domain for all the wrong the reasons.
The government announced stimulus and measures needed to be complimented by rapid actions by all the responsible state agencies particularly those supporting small and medium enterprises.
The South African-based and national DFI’s have been decidedly lackadaisical in their approach and incredibly flat footed in their response during this pandemic.
The inexplicable collapse of the Land Bank, the second in a decade, is simply not assisting in their image and perception.
While it is understandable that because most of them are tied to the sovereign, they have been hurt by the recent downgrading of South Africa credit rating deeper into junk.
This has without doubt constrained their financial resources and balance sheet. DFI’s intervention are not confined to financial intervention. As part of their catalytic role, they should deploy all other non-financial technical assistance to help companies navigate this crises and shape the market of the future.
The recovery and rebuilding of the South Africa economy will not be easy. The task will be even more daunting in an atmosphere of highly constrained fiscal space, diminished demand and impaired supply.
It becomes, therefore, extremely important to measure aimed at injecting liquidity and funding. We must also disabuse ourselves immediately of any hope of returning to the pre-Covid 19 levels any time soon.
The idea of the so-called v-shaped recover is not only optimistic, but highly unlikely.
The recovery will, therefore, be a slow and painful slog. President Cyril Ramaphosa has already hinted that rebuilding the economy, may entail radical policy action and will certainly not be business as usual.
Early indication from the SA Reserve Bank-government guarantee scheme seem to indicate that the take up have been slow. This is an ominous sign and is deeply troubling.
It may be sign that the damage and haemorrhage of businesses due to Covid-19 pandemic may have been much more severe.
This fact alone makes it all the more urgent that South Africa adopts an all hands on deck to Covid-19 business interventions.
While the R300 billion government guarantee scheme is currently executed through the commercial banks, it is necessary that the DFI’s be involved in this arrangement.
DFI’s can provide flexible capital and are able to play on both side of the balance sheet; namely providing loan and equity.
Through innovative structuring and syndication, these transactions have the potential to sustain these businesses and retain the jobs.
This DFI’s and commercial banking collaboration and partnership at all levels - strategic, portfolio and transaction - is what is needed at this point.
This partnership must not only be confined to the banks, DFI’s and the government. The role of organised business is absolutely critical to ensure these efforts are fit for purpose and are not wrong-headed. The initiative of the Saubc in convening this dialogue last week ought to be commended.
Landiwe Mahlangu is an economist and director of Amazwe Advisory.