Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
What’s next, “GigFollower”? JobKeeper extension & loan relief will lead to larger problems
In response to the economic fall out of COVID-19, the Australian government took a short-term focus on survival and a “let’s get everyone through this” mentality. At the time, this was the appropriate approach. With large queues outside Centrelink in the middle of a health crisis, there was no time for a more nuanced support package. And, when accounting for 1.5-metre social distancing requirements, alongside unemployment heading north of 10 per cent… that’s a long queue.
We are now starting to emerge from the hibernation of rolling lockouts and can start to see how bad the damage is. For the lucky businesses, it will be like a bad dream as operations return to normal very quickly. These are the companies that JobKeeper was designed to keep afloat – and for them, it worked perfectly. In some cases, it was a net positive, as their revenue returned to normal and the government continued to pick up the tab for their employees.
The other companies, however, will fall into two categories; those that are no longer viable and those that remain viable but have accumulated too much debt relative to their “new normal” lower earnings profile. Broad-brush government support such as JobKeeper is not an efficient use of government funding for either of these types of businesses and will not add to long-term viability or employment.
The first category of companies is those that are no longer viable. These are loss-making regardless of how much debt they have. Every day their door is open, they go backwards. If it is no longer attributable to a short term impact, it is critical that these businesses are allowed to fail so that labour and capital can be redeployed somewhere more productive. Providing support to this type of business is simply throwing good money after bad.
The second are companies that have too much debt. These are viable and are making money, but they now cannot withstand the historical debt levels. Providing government support to these types of companies is tantamount to transferring money to the debt-holders, and is not supporting the economy or employment. These businesses will continue to operate regardless, however, they should be restructured with debt forgiven or converted into equity.
The challenge lies in identifying which companies fall into which buckets. It is easy for governments to slip into the mindset of picking winners with programs such as “HomeBuilder,” where they try to prop up the trades industry. What’s next? “HolidayMaker,” an incentive for people to visit regional tourism operators? “GigFollower,” an incentive for people to see a local band play?
It’s a slippery, costly and inefficient slope of government interference and self-interested industry lobby groups trying to get a piece of the government pie. It’s economics via the marketing department, with a brief listening stop at a market research focus group.
Government programs must avoid this trap. In order to ensure that funding does not flow to businesses that are no longer viable, one simple step is to amend the staged withdrawal of JobKeeper such that employees must continue to be paid the minimum $1,500 in order to qualify for the reduced $1,200 a fortnight amount. Then, continue to phase-down the government support to zero over the next year.
If employers aren’t able to support such a small reduction in JobKeeper, then the current employment situation is no longer viable, and this employee should be looking for work elsewhere.
The other step involves linking JobKeeper to earnings before interest and tax (EBIT). Just because a company has a large balance-sheet debt does not necessarily mean it should qualify for government support. If the company is cash flow (and P&L)-positive before funding costs, it should no longer qualify for government support. For these companies, the burden of recapitalising the company should be pushed back to its creditors.
The government can still play a role here by removing the impediments to banks completing debt-for-equity conversions. This could be through regulatory capital relief and/or through the establishment of a separately capitalised vehicle to house equity interests. This vehicle could be overseen by the government to ensure lenders don’t pursue predatory practices. For companies below a certain size, there could be agreed-upon standards for taking equity positions. These could include:
- Maximum ownership percentage
- Buyback options allowing the business owner to buy the bank’s position back at a pre-agreed value
- Exit clauses that specify that the company must run a market process to sell the bank’s position within a certain number of years
With the money saved from the removal of these inefficient forms of government expenditure, funding can be redirected toward public works programs to provide short-term employment, tax incentives for investment into earlier-stage companies or grants and fund matching for the establishment of new small businesses such as cafes and restaurants.
Banks and governments have been focussing too much on saving unsustainable ‘zombie’ companies, essentially kicking the can down the road. Tighter eligibility and more active management of government support throughout the gradual reopening of the country is essential.
