Survival to growth: SA must think out of the box to provide solvency relief

“The first imperative is liquidity. We must do whatever we can to stabilise financial markets and banks by providing ample access to cash. Then we must look for ways of ensuring solvency, and finally, growth.”

These were the words of Banque de France governor Francois de Villeroy de Galhau in a speech to Bocconi University last week.

As Europe starts to — hopefully — see some light at the end of the tunnel, indeed the focus has switched from ensuring the monetary and economic system does not collapse to an even more difficult challenge: Trying to understand what life will be like when we emerge from the darkness.

Growth will be the imperative

To escape this unprecedented downturn, policy makers need to put the aim of restoring macroeconomic expansion front and centre of their thinking. That is the only way to escape the clutches of the debt that has been incurred during this crisis.

But how to do that? It is self-evident that macroeconomic policy, be it monetary or fiscal, is easier than microeconomic policy-making. The general is always more straightforward than the selective.

What measures should be implemented by policy makers to stimulate the microeconomy and create productivity and economic growth?

The plan in Europe

Amid other measures tabled by the European Union (EU), the plan for reviving economic growth in Europe takes the form of the (yet to be fully published) European Recovery Fund. The details which have emerged thus far show that it will be between €1 trillion and €1.5 trillion and take the form of a mixture between loans and grants to member states. 

Beyond this “recovery” side, a “repair” side will address the issue of growth. 

Several economists, including Elena Carletti, professor of Finance at Bocconi University and Marti Subrahmanyam of NYU Stern Business School, have proposed the promising avenue of a temporary “European Pandemic Equity Fund,” which would be managed by the European Investment Bank.

This would be an equity fund to inject capital into key companies, both public and private, especially those operating in strategic European value chains. This could take the form of hybrid capital instruments, with no voting rights, but would provide critically needed equity capital to ensure solvency of those businesses hardest hit by the crisis and allow them to grow and support the economy beyond the crisis.

Key aspects of South Africa’s response

I do not need to rehash the details of South Africa’s equivalent R500 million recovery fund, but I will highlight certain key aspects:

Firstly, how will it be financed and what will it be for?

The first is a mixture of efforts: Some reprioritisation of funds already earmarked in the budget, some new borrowing, but mostly, it will be government guarantees of commercial bank loans.

The second point is hazier. One would imagine it will chiefly be unemployment insurance and credit lines to distressed companies that are guaranteed by the Treasury.

South Africa needs alternative plan

Following the plans mooted by the EU, I believe South Africa should seriously consider implementing something similar, an “Economic Recovery Equity Investment Fund”.

Government would provide the seed capital, possibly via the Public Investment Corporation (PIC). This would be invested in a separate, audited vehicle with a board of directors from the private sector, with experience in private equity, management, and investment banking. 

The private sector would leverage this capital by providing additional funding. 

These assets under management could then be used to invested in certain types of companies, say SMEs with employees fewer than 500 or those in key economic sectors, as identified in the Growth Plan of the National Treasury released last year. 

Five criteria for a South African ‘Economic Recovery Equity Investment Fund’

There are five criteria around which this initiative should be managed.

1. It must be effective, in being large enough to be decisive regarding the South African economy.
2. After the initial injection of equity, when some financial restrictions may be imposed, it should be passive.
3. It must be temporary and preferably self-liquidating through open-market sales or redemptions.
4. It should ideally provide taxpayers an upside claim if and when the rescued firm recovers; and
5. It must be timely, as speed is crucial.

As soon as the economy start to recover, the fund would look to exit these investments providing return on investment for the public sector, as well as private investors. Companies employing thousands of South Africans in key economic sectors would be saved.

This would be a true example of the state partnering with the private sector to provide solvency relief and investment for long-term growth when and where it is needed most.